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PHILIPPINE SAVINGS BANK
(A banking corporation organized and existing under Philippine Laws)
Php2,000,000,000.00 10.00% Subordinated Notes Due 2016
Callable with Step-Up in 2011
Issue Price 100.00%
Philippine Savings Bank (the ��Bank’’ or the ��Issuer’’) intends to issue up to Php2,000,000,000.00 worth
of 10.00% Unsecured Subordinated Notes due 2016, callable with step up in 2011 (the ��Notes’’). From
and including 27 January 2006 to but excluding 27 January 2011, the Notes will bear interest at the rate
of 10.00% per annum and shall be payable quarterly in arrears every 27th of January, April, July, and
October of each year, commencing 27 April 2006. Unless the Notes are previously redeemed, the
interest rate from and including 27 January 2011 to but excluding 27 January 2016 will be reset at the
equivalent of the five-year MART1 FXTN (as of Reset Date) multiplied by 80.00%, plus a spread of
4.2815% per annum, and such stepped-up interest shall be payable quarterly in arrears every 27th of
January, April, July, and October of each year, commencing 27 April 2011. The Notes will mature on 27
January 2016 provided that the Notes are not previously redeemed.
Subject to satisfaction of certain regulatory approval requirements, the Bank may, one business day after
27 January 2011, redeem all and not less than all of the outstanding Notes, at a redemption price equal
to the face value of the Notes together with accrued and unpaid interest based on the Interest Rate
thereon. See Terms and Conditions of the Notes. The Notes will constitute direct, unconditional,
unsecured and subordinated obligations of the Bank, and will, at all times, rank pari passu and without
any preference among themselves and at least equally with all other present and future unsecured and
subordinated obligations of the Bank. See Terms and Conditions of the Notes.
The Notes have been rated PRS Aa plus by the Philippine Rating Services Corporation (PhilRatings).
This rating will relate to the timely payment of interest on the Notes and the full payment of principal of
the Notes on or before 27 January 2016. A rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the rating agency concerned.
An application for the issuance of the Notes has been filed with the Bangko Sentral ng Pilipinas (the
��BSP’’) and was approved on 28 December 2005. The BSP takes no responsibility for the correctness of
any of the statements made or opinions or reports contained in this Offering Circular.
See ��Investment Considerations’’ beginning on page 13 for a discussion of certain factors to be
considered in connection with an investment in the Notes.
The Notes will be registered in scripless form and in minimum denomination of Php500,000.00 and in
increments of Php100,000.00. The Notes will be represented by a Master Note, which will be deposited
with the Registry. It is intended that, upon issuance, the Notes will be immobilized and lodged in the
Registry. However, a Registry Confirmation will be issued by the Registry in favor of the holders of the
Notes in accordance with the regulations of the BSP. Once lodged, the Notes will be eligible for
electronic book-entry transfers in the Registry Book without the issuance of other evidences of
certificates, and any sale, transfer, or conveyance of the Notes shall be coursed through a Market Maker
or the fixed income exchange, as the case may be. See Limitations on Transfers. When the Philippine
Dealing & Exchange Corporation (��PDEx’’) becomes operational as the fixed-income exchange for these
Notes, the Issuer intends to list the Notes in the PDEx. Upon listing of the Notes in the PDEx, the
services of the Market Maker shall cease and secondary trading on the Notes will henceforth be
conducted in the PDEx.
Lead Manager and Selling Agent
Selling Agent
Limited Selling Agent
MULTINATIONAL INVESTMENT
BANCORPORATION
Offering Circular 24 January 2006
The date of this Offering Circular is 24 January 2006.
The BSP has, on 28 December 2005, approved the issuance and sale of the Notes.
The Bank confirms that this Offering Circular contains all information with respect to the Bank
and the Notes which are material in the context of the issue and offering of the Notes, that the
information contained herein are true and accurate in all material respects, are not
misleading, that the opinions and intentions expressed herein are honestly held and have
been reached after considering all relevant circumstances and are based on reasonable
assumptions, that there are no other facts, the omission of which would, in the context of the
issue and offering of the Notes, make this document as a whole or any of such information or
the expression of any such opinions or intentions misleading in any material respect and that
all reasonable inquiries have been made by the Bank to verify the accuracy of such
information. The Bank accepts responsibility accordingly.
In making an investment decision, the recipient of this document must rely on his own
examination of the Bank and the terms of the offering of the Notes, including the merits and
risks involved. By receiving this Offering Circular, the recipient acknowledges that (i) he has
not relied on ING Bank, N.V., Manila Branch (��ING Bank’’) (the ��Lead Manager’’), Multinational
Investment Bancorporation (��MIB’’), or Philippine Savings Bank (collectively, the ��Selling
Agents’’) or any person affiliated with the Lead Manager or the Selling Agents in connection
with his investigation of the accuracy of any information in this Offering Circular or his
investment decision, and (ii) no person has been authorized to give any information or to
make any representation concerning the Bank, or the Notes other than as contained in this
Offering Circular and, if given or made, such information or representation should not be
relied upon as having been made or authorized by the Bank or the Lead Manager.
This Offering Circular contains forward looking statements that include, among others,
statements concerning the Bank’s plans relating to (i) the expansion of its business and
operations; (ii) the growth in its customer base and loan portfolio; (iii) the implementation of
new information and other technologies; (iv) the ability to provide new products and services;
and (v) the increase in its operational efficiencies, and other statements of expectation, belief,
future plans and strategies, anticipated developments and other matters that are not historical
facts and which may involve predictions of future circumstances. Investors are cautioned that
these forward looking statements are subject to risks and uncertainties that could cause
actual events or results to differ from those expressed or implied by the statements contained
herein and no assurance can be given that the future results will be achieved. Actual events
or results may differ materially as a result of the risks and uncertainties the Bank faces. Such
risks and uncertainties include, but are not limited to (i) actions taken by the BSP, who is the
regulator of the banking industry in the Philippines, and by the government of the Republic of
the Philippines; (ii) actions taken by the Bank’s competitors; and (iii) general economic and
political conditions in the Philippines.
No representation or warranty, express or implied, is made by the Lead Manager or the
Selling Agents as to the accuracy or completeness of the information contained in this
Offering Circular. Neither the delivery of this Offering Circular nor the offer of Notes shall,
under any circumstances, constitute a representation or create any implication that there has
been no change, material or otherwise, in the condition, operations, or affairs of the Bank
since the date of this Offering Circular or that any information contained herein is correct as of
any date subsequent to the date hereof.
None of the Bank, the Lead Manager or the Selling Agents, or any of their respective affiliates
or representatives makes any representation to any purchaser of the Notes regarding the
legality of an investment by such purchaser under any applicable laws. In addition, the
recipient should not construe the contents of this Offering Circular as legal, business, tax, or
investment advice. The recipient should be aware that he may be required to bear for an
indefinite period the risks, financial, tax, or otherwise of an investment in the Notes. The
recipient is encouraged to consult with his own advisers as to the legal, tax, business,
financial, and other related aspects of a purchase of the Notes.
This document does not constitute an offer or solicitation by anyone in any jurisdiction in
which such offer or solicitation is not authorized or to any person to whom it is unlawful to
make any such offer or solicitation. Each investor in the Notes must comply with all applicable
laws and regulations in force in the jurisdiction in which it purchases or offers to purchase
such Notes, and must obtain the necessary consent, approval, or permission for its purchase,
or offer to purchase such Notes under the laws and regulations in force in any jurisdiction to
which it is subject or in which it makes such purchase or offer, and neither the Bank nor the
Lead Manager shall have any responsibility thereof. Interested investors should inform
themselves as to the applicable legal requirements under the laws and regulations of the
countries of their nationality, residence, or domicile and as to any relevant tax or foreign
exchange control laws and regulations that may affect them.
3
TABLE OF CONTENTS
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
OFFERING CIRCULAR SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
TERMS AND CONDITIONS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
CAPITALIZATION OF THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
DESCRIPTION OF THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
MANAGEMENT, EMPLOYEES, AND SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
THE PHILIPPINE BANKING INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
BANKING REGULATION AND SUPERVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
PHILIPPINE TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN
INTERNATIONAL FINANCIAL REPORTING STANDARDS AND
PHILIPPINE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES . . . . . . . . . . . . . . . . .
91
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-1
4
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by, and should be read in conjunction with,
the more detailed information found elsewhere in this Offering Circular and the agreements
regarding the issuance, maintenance, servicing, trading and settlement of the Notes, including
the Master Notes, the Trust Agreement, and the Registry and Paying Agency Agreement, and
all amendments to each of them (the ��Agreements’’). Defined terms in these Agreements shall
have the same meaning when used in this Offering Circular.
Prospective investors should read this entire Offering Circular and the Agreements fully and
carefully, including Investment Considerations and the Bank’s audited financial statements
and the related notes as well as the Bank’s unaudited financial statements. In case of any
inconsistency between this summary and the more detailed information in this Offering
Circular or the Agreements, then the more detailed portions and/or the Agreements, as the
case may be, shall at all times prevail.
Description of the Bank
Philippine Savings Bank (the ��Bank’’) was established on 30 June 1959 primarily to engage in
savings and mortgage banking. The Bank has outpaced some of its key competitors and is,
today, the country’s 2nd largest thrift bank in terms of assets. The Bank is the country’s first
publicly listed thrift bank. The Bank caters mainly to the retail and consumer markets and
offers a wide range of products and services such as deposits, loans, treasury, and trust. As
of 30 September 2005, it has 150 branches. The Bank’s total assets stood at Php45.79 billion
and Php53.24 billion as of 31 December 2004 and 30 September, 2005, respectively. Its total
capital funds were at Php4.25 billion and Php5.01 billion as of 31 December 2004 and 30
September 2005, respectively.
The Bank is 74.00%-owned by the Metropolitan Bank & Trust Company (��Metrobank’’), a
universal bank that provides a full range of banking and other financial services through its
local and international branches. It is the country’s largest private domestic bank with assets
of Php478.39 billion as of 30 September 2005 and has an extensive distribution network of
over 562 branches nationwide.
Strategy of the Bank
The Bank’s vision is to be the country’s consumer and retail bank of choice. It also aims to
become the country’s largest and most profitable thrift bank. It will continue to harness
inherent synergies with Metrobank and, at the same time, differentiate itself and grow the
business organically. Its objective is to stay ahead of the profitability curve, and narrow the
gap of competition through sustained focus on core markets, customer acquisition programs
and expanded customer coverage. These will be achieved through cross-selling better
products and services, network expansion, and fostering a customer-centric performance
oriented culture within the Bank. See Description of the Bank — Strategy of the Bank.
The Offer
The Bank intends to issue Php2,000,000,000.00 worth of 10.00% Unsecured Subordinated
Notes due 2016 callable with step up in 2011 (the ��Notes’’). From and including 27 January
2006 to but excluding 27 January 2011, the Notes will bear interest at the rate of 10.00% per
annum and shall be payable quarterly in arrears every 27th of January, April, July, and
October of each year, commencing 27 April 2006. Unless the Notes are previously redeemed,
the interest rate from and including 27 January 2011 to but excluding 27 January 2016 will be
reset at the equivalent of the five-year MART1 FXTN (as of Reset Date) multiplied by 80.00%
plus a spread of 4.2815% per annum, and such stepped-up interest shall be payable quarterly
in arrears every 27th of January, April, July, and October of each year, commencing 27 April
2011. The Notes will mature on 27 January 2016 provided that the Notes are not previously
redeemed. See Terms and Conditions of the Notes.
5
Risks of Investing
Prospective investors in the Notes should consider the current and immediate political and
economic factors in the Philippines as a principal risk for investing. Political instability and
threats to local and regional currencies may also influence the operations, growth, and
profitability of the Bank. Of equal importance are the investment considerations regarding the
Bank’s operations. Consideration must likewise be placed on the fact that the Notes are inter
alia (i) unsecured; (ii) subordinated in right of payment to claims of all depositors and other
creditors of the Bank, except those creditors that are expressly ranked equally with or junior
to the Noteholders in right of payment; (iii) not subject to set-off; (iv) not eligible for collateral
for any loan made by the Bank or any of its affiliates and (v) not insured by Philippine Deposit
Insurance Corporation (��PDIC’’). See Investment Considerations.
Use of Proceeds
The Issuer expects to raise some Php1.964 billion from the Offer after the deduction of fees,
commissions, expenses and the documentary stamp tax. The net proceeds are to be used to
raise Tier 2 capital to increase and strengthen the capital base of the Issuer. — See Terms
and Conditions of the Notes.
6
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information of the Bank which has been
derived from the audited financial statements of the Bank as of 31 December 2004, 2003, and
2002, including the notes thereto, included elsewhere in the document, and for the unaudited
financial information of the Bank for the nine-month period ended 30 September 2005 and
2004. The unaudited interim financial statements are provided for reference purposes only
and should not be relied upon by investors to provide the quality of information of the Bank
associated with an audit. Neither the Bank nor the Lead Manager or Selling Agents make any
representation regarding the sufficiency of the unaudited interim financial statements for an
assessment of the statements of condition, income, and cashflows of the Bank.
The Bank, in accordance with Philippine regulations and practice, publishes unaudited interim
financial statements. The unaudited financial statements of the Bank are not necessarily
indicative of their results of operations for the full year.
Such audited financial statements and unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in the Philippines
(��Philippine GAAP’’), which differ in certain significant respects from International Accounting
Standards (��IAS’’). A summary of the significant differences between Philippine GAAP and
IFRS is contained herein under the heading ��Summary of Significant Differences between
IFRS and Philippine GAAP.’’
These financial statements are prepared under the historical cost convention, as modified for
the measurement at fair market value of trading account securities. The preparation of the
bank statements in accordance with Philippine GAAP requires the Bank to make estimates
and assumptions that affect the reported amount of income, expenses, resources and
liabilities and disclosure of contingent assets and liabilities. Future events may occur which
will cause the assumptions used in arriving at the estimates to change. The effect of any
changes in estimates will be recorded in the financial statements when determinable.
New accounting standards based on IAS and International Financial Reporting Standards
(IFRS), referred to as Philippine Accounting Standards (PAS) or Philippine Financial Reporting
Standards (PFRS), respectively, became effective in 2005. The Bank’s results of operations
and financial position have been, and will continue to be, affected by certain changes to
Philippine GAAP, which are intended to align Philippine GAAP further with IFRS. With the
adoption of the new accounting standards effective 1 January 2005, the Bank shall be fully
converted and aligned with IFRS except in certain aspects. Set forth below is a summary of
the new accounting standards effective for annual periods beginning on or after 1 January
2005, which the Bank believes may have a significant effect on its financial position and
results of operations.
.
PAS 19, Employee Benefits, requires the projected unit credit method to be used in
measuring retirement benefit expense and a change in the manner of computing benefit
expense relating to past service cost and actuarial gains and losses. PAS 19 requires the
Bank to determine the present value of defined benefit obligations and the fair value of
any plan assets with sufficient regularity that the amounts recognised in the financial
statements do not differ materially from the amounts that would be determined at the
balance sheet date. If there is a difference between the defined benefit obligations and
the fair value of the plan assets, a transitional liability or asset will be adjusted against
retained earnings upon adoption of this standard. The Bank has appointed an actuary to
perform an actuarial valuation of the retirement benefit obligations in accordance with
PAS 19, and to determine the amount of such transitional liability or asset.
.
PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the capitalization
of foreign exchange losses. The Bank believes that the effect of adopting this standard
on the financial statements is not material.
7
.
PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial
Institutions, provides for the required disclosure and presentation in respect of the
accounts of banks and similar financial institutions. It also provides that provision for
general banking risks is treated as an appropriation of surplus and should not be
included in the determination of net income for the period. New disclosures will be
included in the financial statements, where applicable, upon its adoption.
.
PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and
presentation of all financial instruments. PAS 32 requires disclosures about the Bank’s
financial instruments, whether recognised or unrecognised in the financial statements.
New disclosure requirements include terms and conditions of financial instruments used
by the Bank, types of risks associated with both recognised and unrecognised financial
instruments (market risk, price risk, credit risk, liquidity risk and cash flow risk), fair value
information of both recognised and unrecognised financial assets and financial liabilities,
and the Bank’s financial risk management policies and objectives. PAS 32 also requires
financial instruments to be classified as liabilities or equity in accordance with their
substance and not their legal form.
.
PAS 39, Financial Instruments: Recognition and Measurement, establishes the
accounting and reporting standards for recognising and measuring the Bank’s financial
assets and financial liabilities. The standard requires a financial asset or financial liability
to be recognised initially at fair value. Subsequent to initial recognition, the Bank should
continue to measure financial assets at their fair values, except for loans and receivables
and held-to-maturity investments, which are to be measured at cost or amortised cost
using the effective interest rate method. Financial liabilities are subsequently measured
at cost or amortised cost, except for liabilities classified as ��at fair value through profit
and loss’’ and derivatives, which are subsequently to be measured at fair value. PAS 39
also covers the accounting for derivative instruments. This standard has expanded the
definition of derivative instruments to include derivatives (and derivative-like provisions)
embedded in non-derivative contracts. Under the standard, every derivative instrument is
recorded in the balance sheet as either an asset or liability measured at its fair value.
Derivatives that do not qualify as hedges are adjusted to fair value through income. If a
derivative is designated and qualifies as a hedge, depending on the nature of the
hedging relationship, changes in the fair value of the derivative are either offset against
the changes in fair value of the hedged assets, liabilities, and firm commitments through
earnings, or recognised in stockholders’ equity until the hedged item is recognised in
earnings. The Bank must formally document, designate and assess the hedge
effectiveness of derivative transactions that receive hedge accounting treatment. The
Bank has identified but not yet determined the value of its derivative and embedded
derivative contracts in accordance with PAS 39. The impact of PAS 39 will be
retroactively computed, as applicable, and adjusted to retained earnings as at 1
January 2005. Prior years’ financial statements will not be restated, pursuant to
Philippines SEC Memorandum Circular No. 19 dated 22 December 2004.
.
PAS 40, Investment Property, prescribes the accounting treatment for investment
property and related disclosure requirements. This standard permits the Bank to
choose either the fair value model or cost model in accounting for investment property.
Fair value model requires an investment property to be measured at fair value with fair
value changes recognized directly in the statements of income. Cost model requires that
an investment property should be measured at depreciated cost less any accumulated
impairment losses. The Bank opts to adopt the cost model in accounting for its
investment property. The effect of adopting the cost method in accounting for the real
and other properties owned or acquired (ROPOA) has not yet been quantified.
.
PFRS 3, Business Combination, which will result in the cessation of the amortization of
goodwill and a requirement for an annual test for goodwill impairment. Any resulting
negative goodwill after performing reassessment will be credited to income. Moreover,
pooling of interests in accounting for business combination will no longer be permitted.
The Bank believes that the effect of adopting this standard will not result in material
adjustment, except for the non-amortization of goodwill starting 1 January 2005.
8
.
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies the
accounting for assets held for sale and the presentation and disclosure of discontinued
operations. It requires assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to sell, and the
depreciation on such assets to cease. Furthermore, assets that meet the criteria to be
classified as held-for-sale should be presented separately on the face of the statements
of condition and the results of discontinued operations to be presented separately in the
statements of income. The Bank believes that effect of adopting this standard will not be
material on the financial statements.
The Bank will also adopt in 2005 the following revised standards:
.
PAS 1, Presentation of Financial Statements, provides a framework within which an entity
assesses how to present fairly the effects of transactions and other events; provides the
base criteria for classifying liabilities as current or noncurrent; prohibits the presentation
of income from operating activities and extraordinary items as separate line items in the
statements of income; and specifies the disclosures about key sources of estimation
uncertainty and judgments that management has made in the process of applying the
entity’s accounting policies.
.
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the
concept of fundamental error and the allowed alternative to retrospective application of
voluntary changes in accounting policies and retrospective restatement to correct prior
period errors. It defines material omission or misstatements, and describes how to apply
the concept of materiality when applying accounting policies and correcting errors.
.
PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the statement of condition date.
.
PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on
recognition and measurement of items of property, plant and equipment. It also provides
that each part of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately.
.
PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land
and buildings and prohibits expensing of initial direct costs in the financial statements of
lessors.
.
PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope
of the standard, the definitions and the disclosures for related parties. It also requires
disclosure of the compensation of key management personnel by benefit type.
.
PAS 28, Investments in Associates, reduces alternatives in accounting for associates in
consolidated financial statements and in accounting for investments in the separate
financial statements of an investor. Investments in associates will be accounted for either
at cost or in accordance with PAS 39 in the separate financial statements. Equity method
of accounting will no longer be allowed in the separate financial statements. This
standard also requires strict compliance with adoption of uniform accounting policies and
requires the investor to make appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for reporting like
transactions and other events in similar circumstances.
.
PAS 33, Earnings Per Share, prescribes principles for the determination and presentation
of earnings per share for entities with publicly traded shares, entities in the process of
issuing ordinary shares to the public, and any entities that calculate and disclose
earnings per share. The standard also provides additional guidance in computing
earnings per share including the effects of mandatorily convertible instruments and
contingently issuable shares, among others.
9
.
PAS 36, Impairment of Assets, establishes frequency of impairment testing for certain
intangibles and provides additional guidance on the measurement of an asset’s value in
use.
.
PAS 38, Intangible Assets, provides additional clarification on the definition and
recognition of certain intangibles. Moreover, this revised accounting standard requires
that an intangible asset with an indefinite useful life should not be amortized but will be
tested for impairment by comparing its recoverable amount with its carrying amount
annually and whenever there is an indication that the intangible asset may be impaired.
The Bank believes that the adoption of these revised standards will not have material impact
on the financial statements.
See ��Considerations Relating to the Bank — Accounting Principles’’.
The amounts presented in the unaudited financial statements of the Issuer as of and for the
nine months ended September 30, 2005 and 2004 included in the Offering Circular do not
reflect adjustments pertaining to the adoption of the new and the revised Philippine
Accounting Standards (��PAS’’) and Philippine Financial Reporting Standards (��PFRS’’) which
took effect January 1, 2005. In accordance with Philippines Securities and Exchange
Commission (the ��Philippine SEC’’) Memorandum Circular No. 19 dated December 22, 2004,
interim unaudited financial statements in 2005 for purposes of submission to Philippine SEC
need not reflect the adoption of these new accounting standards. There may be material
adjustments that need to be made to the accounts for them to be in conformity with current
Philippine GAAP.
The following selected financial information should be read together with other portions of this
Offering Circular.
Table 1. Selected Statements of Income Data
For the nine months ended
30 September
(In Php)
Interest income
Interest expense
Provision for Probable Losses
Net interest income after
Provision for Probable
Losses
Other income
Other expenses
Income before income tax
Provision for (benefit from)
income tax
Net income
2005
2004
For the year ended 31 December
2004
2003
2002
(Restated)
(Restated)
3,634,903,077
1,602,076,059
275,000,000
2,648,613,795
1,242,016,567
41,000,000
3,707,544,188
1,746,419,763
120,900,000
2,724,818,876
1,196,744,901
127,136,284
2,321,731,611
912,006,860
31,446,032
1,757,827,018
535,445,924
1,871,056,799
422,216,143
1,365,597,228
480,505,098
1,522,849,455
323,252,871
1,840,224,425
645,436,686
2,038,318,219
447,342,892
1,400,937,691
550,701,594
1,534,099,681
417,539,604
1,378,278,719
422,720,752
1,503,652,978
297,346,493
(5,568,933)
427,785,076
18,430,868
304,822,003
Source: PSBank
10
(38,210,189)
485,553,081
(53,707,286)
471,246,890
17,614,665
279,731,828
Table 2. Statements of Condition Data
For the nine months ended
30 September
(In Php)
Cash and other cash items
Due from Bangko Sentral ng
Pilipinas
Due from other banks
Interbank loans receivable
Trading and investment
securities — net
Available for Sale Securities
Investments in Bonds & Other
Debt Instruments — net
Receivables from Customers
— net
Bank premises, furniture,
fixtures and equipment —
net
Real and other properties
owned or acquired — net
Deferred Tax Assets and
Other resources — net
Total resources
Deposit liabilities
Bills payable
Cashier’s & Gift Checks
Accrued interest, taxes and
other expenses
Other liabilities
Capital funds
2005
2004
For the year ended 31 December
2004
2003
2002
(Restated)
(Restated)
467,117,281
432,396,699
750,408,617
759,540,596
532,832,207
1,774,617,226
881,213,884
550,000,000
1,057,645,384
1,792,427,729
585,000,000
1,958,275,032
885,962,808
200,000,000
1,651,912,913
837,287,402
—
811,896,670
1,622,442,235
500,000,000
127,302,027
13,164,869,943
79,132,607
—
71,869,207
2,081,332,979
2,725,192
—
11,775,022
—
4,060,661,601
11,348,095,859
11,188,618,814
6,278,262,138
4,614,482,073
26,799,876,607
22,927,211,515
23,649,151,935
19,651,187,233
15,811,346,948
1,780,966,145
1,520,643,095
1,539,244,694
1,503,691,336
1,443,688,894
1,775,978,723
1,694,635,111
1,734,525,166
1,667,809,868
1,602,369,211
1,853,598,659
53,236,202,096
46,807,220,933
—
214,856,674
1,391,052,127
42,828,240,126
37,384,659,781
—
206,385,088
1,729,283,003
45,788,672,255
40,245,584,721
—
211,541,049
1,251,645,215
33,604,061,893
27,772,689,629
656,206,699
135,778,875
718,613,807
27,669,447,067
22,329,386,271
800,000,000
154,659,030
460,704,991
738,478,339
5,014,941,159
330,009,940
710,179,827
4,197,005,490
388,262,862
691,848,865
4,251,434,758
295,326,030
851,877,173
3,892,183,487
224,976,520
452,286,217
3,708,139,029
Source: PSBank
Table 3. Selected Financial Ratios
For the nine months ended
30 September
(In percent unless
otherwise stated)
Return on assets (1)
Return on capital funds (2)
Net interest margin (3)
Cost to income ratio (4)
Gross loans to deposits (5)
Core capital ratio (6)
Total capital adequacy ratio (7)
Total tangible capital funds to
total tangible assets (8)
Total non-performing loans to
total gross loans (9)
Allowances for probable loan
losses to total gross
loans (10)
Allowances for probable loan
losses to total nonperforming loans (11)
Allowance for probable losses
to total non-performing
assets(12)
Specific provisions to nonperforming loans
Specific provision to gross
loans
Earnings per share (PHP) (13)
2005
2004
For the year ended 31 December
2004
2003
2002
1.12
12.07
5.83
72.85
59.72
12.67
13.54
1.07
9.17
5.59
80.70
63.64
13.65
14.41
1.19
11.85
5.57
78.20
60.90
12.49
12.46
1.47
11.20
5.84
73.80
73.14
13.33
13.30
1.14
7.40
6.62
82.06
74.57
13.21
14.04
7.03
8.63
7.66
9.74
10.73
6.28
5.82
6.10
5.65
7.77
4.12
3.64
3.52
3.27
5.04
65.58
62.59
57.64
57.84
64.83
34.70
29.09
28.48
28.49
29.80
50.44
47.52
42.64
42.70
52.74
3.17
3.18
2.76
2.26
2.60
2.71
2.41
2.63
4.10
1.56
Source: PSBank
11
Notes:
(1)
Net income divided by average total resources for the period indicated. Net income for the nine months ended
30 September 2005 and 2004 is annualized. Average total resources is based on the monthly average balance
of total resources for the nine months ended 30 September 2005 and 2004, and for the years ended 31
December 2004, 2003 and 2002. Return on assets for the nine months ended 30 September 2005 and 2004 is
based on annualized net income.
(2)
Net income divided by average total capital funds for the period indicated. Net income for the nine months
ended 30 September 2005 and 2004 is annualized. Average total capital funds is based on the monthly average
balance of capital funds for the nine months ended 30 September 2005 and 2004, and for the years ended 31
December 2004, 2003 and 2002. Return on shareholders’ equity for the nine months ended 30 September 2005
and 2004 is based on annualized net income.
(3)
Net interest income divided by average interest-earning assets. Net income for the nine months ended 30
September 2005 and 2004 is annualized.
(4)
Total operating expenses divided by net interest and other income.
(5)
Total gross loans divided by total customer deposits.
(6)
Net Tier 1 capital divided by total risk weighted assets.
(7)
Total qualifying capital less deductions divided by total risk weighted assets.
(8)
Total tangible capital funds divided by total tangible assets.
(9)
Total non-performing loans divided by total gross loans.
(10)
Total allowance for probable loan losses divided by total gross loans.
(11)
Total allowance for probable loan losses divided by total non-performing loans.
(12)
Total allowance for probable losses divided by total non-performing assets (comprising real and other properties
owned or acquired (��ROPOA’’) and non-performing loans).
(13)
Annualized net income divided by weighted average number of outstanding common shares.
Source: PSBank
12
INVESTMENT CONSIDERATIONS
An investment in the Notes involves a number of investment considerations. Prospective
investors should carefully consider all the information contained in this Offering Circular,
including the investment considerations described below, before making an investment
decision. The business, financial condition and results of operations of the Bank could be
materially and adversely affected by any of these investment considerations. The market price
of the Notes could decline due to any one of these risks, resulting in loss of all or part of the
initial investment in the Notes. The following discussion is not intended to be a
comprehensive discussion of the risk and other factors and is not in any way meant to be
exhaustive. Investors are encouraged to make their own independent legal, financial, and
business examination of the Bank and the market. Neither the Bank nor the Lead Manager
makes any warranty or representation on the marketability, price, or market increments or
profits that may arise out of any investment in the Notes.
General Considerations
Political and Economic Developments in the Philippines
The general political situation in, and the state of the economy of, the Philippines may
influence the growth and profitability prospects of the Bank. Any political or economic
instability in the future may have a negative effect on the financial results of the Bank.
Political Climate
The Philippines has from time to time experienced political and military instability. On 10 May
2004, national elections were held for the positions of President, Vice President, 12 Senators,
more than 200 Representatives and all local government posts (excluding Barangay officials).
On 24 June 2004, a joint session of Congress declared Gloria Macapagal-Arroyo and Noli de
Castro as President-elect and Vice President-elect, respectively. They began their 6-year
terms on 30 June 2004.
Ms. Arroyo first became president in January 2001 after the impeachment of former President
Joseph Estrada. Criminal charges for perjury and plunder have been filed against Mr. Estrada
with the Sandiganbayan, a special court with jurisdiction over criminal and civil cases
involving graft and corruption. Hearings on these charges are ongoing.
Both Ms. Arroyo and Mr. de Castro are members of the ruling Koalisyon ng Katapatan at
Karanasan para sa Kinabukasan (��K4’’) coalition. In the elections, the ruling coalition enlarged
its majority in the 13th Congress of both the Senate and the House of Representatives, which
convened on 26 July 2004. Certain opposition candidates, including defeated presidential
candidate Fernando Poe, Jr., questioned the election results, alleging fraud and
disenfranchisement of voters. On 23 July 2004, Mr. Poe petitioned the Philippine Supreme
Court, acting in its capacity as the Presidential Electoral Tribunal, to order a recount of
approximately 60.00% of votes cast nationwide. In response, President Arroyo and VicePresident de Castro asked the tribunal to dismiss the petition for lack of merit. Mr. Poe died
on 14 December 2004, after suffering a stroke. The petition of his widow, Susan Roces, in the
Supreme Court to pursue the electoral protest on behalf of her late husband was unanimously
dismissed on 28 March 2005 on the grounds that no real party in interest had filed a case to
intervene or to be a substitute for Mr. Poe.
Allegations of fraud and disenfranchisement of voters surfaced thereafter in light of
revelations that President Arroyo had spoken with an official from the independent
Commission on Elections during the counting of votes shortly after the May 2004 election.
President Arroyo has admitted to speaking with an election official, but insists that she did not
participate in fraud or induce the Commission on Elections to tamper with the election. The
President maintains that she won the 2004 elections fairly since the conversations occurred
after the certificates of canvass had been prepared and has cited the approval of international
election observers and the Philippine National Movement for Free Elections.
13
On 7 July 2005, President Arroyo asked the courtesy resignations of her entire cabinet to
allow the rebuilding of a new administration that could more efficiently implement economic
reforms. The next day, 10 of President Arroyo’s senior government officials, including then
Finance, Budget, and Trade Secretaries submitted their resignations and urged President
Arroyo to resign as well. Subsequently, 3 other officials also tendered their resignations,
although 1 of the 3 resigned on 17 July 2005 to focus on his role as government chief
negotiator with the Moro Islamic Liberation Front. As of 1 August 2005, President Arroyo had
replaced 4 of the senior officials, with Margarito Teves as finance secretary, Romulo Neri as
budget secretary, Peter Favila as trade secretary, and Zamzamin Ampatuan as secretary of
the National Anti-Poverty Commission. The rest of the affected departments and agencies are
currently headed by officers-in-charge.
On 25 July 2005, opposition lawmakers in the House of Representatives filed impeachment
proceedings against President Arroyo, based on the allegations of culpable violation of the
Constitution, graft and corruption, and betrayal of the public trust. At least 79 representatives,
or one-third of the 236-member House, must vote in favor of the impeachment complaint
before it can go to the Senate for trial. In August 2005, as the pro-impeachment block failed to
muster the required 79 votes, the House Committee on Justice reviewed and eventually
dismissed the impeachment complaint. The abrupt end to the impeachment proceedings failed
to put complete political closure, thus uncertainty still clouds the political climate to a certain
extent.
However, the Administration believes that President Arroyo has the continued support of a
majority of elected officials at all levels of government, as well as the general support of the
armed forces and the Catholic Church. The chief of the armed forces has ordered field
commanders to ensure the neutrality of soldiers, and the Catholic Bishops Conference of the
Philippines (CBCP) has urged the population to respect and uphold the Constitution.
In her State of the Nation address on 25 July 2005, President Arroyo called for the adoption
of a parliamentary federal form of government to replace the current presidential unitary
system. She abandoned her earlier preference of having a constitutional convention to
address proposed changes to the Constitution and instead supported the option of having the
present Congress sit as a constituent assembly to make such changes, arguing that this was
a faster and less costly process.
No assurance can be given that the future political environment in the Philippines will be
always stable and that current or future governments will adapt economic policies conducive
to sustaining economic growth.
Peace and Order
The Philippines has been subject to various events which threaten the peace and order
situation in various metropolitan areas as well as remote areas of the Philippines. In
particular, the Philippine military has had sporadic clashes with the communist New People’s
Army (��NPA’’) in certain parts of Luzon and the Visayas, and the Moro Islamic Liberation Front
(��MILF’’), Jemaah Islamiyah (��JI’’), and Abu Sayyaf in parts of Mindanao. The NPA, JI, and
Abu Sayyaf have been branded internationally as terrorist organizations and accordingly are
being pursued more vigorously by the military. In contrast, the Government has resumed
formal peace negotiations with the MILF.
There can be no assurance that the counter-terrorism measures being undertaken by the
Government will succeed, or that the Philippines will not be subject to further acts of
terrorism. Any further degradation in the peace and order situation of the country may affect
the overall business climate in the Philippines, including the financial condition of the Bank.
Economic Outlook
The Bank’s business operations and assets are based in the Philippines. As a result, the
Bank’s operations, and the quality and growth of its assets depend, to a large extent, on the
performance of the Philippine economy.
14
The Philippine Government actively encourages domestic and foreign private investment.
Since 1991, the Philippines has further liberalized trade and investment in tandem with the
deregulation of the financial system, foreign exchange liberalization, tax reforms, acceleration
of privatization, enhancement of competition in the provision and operation of public utilities,
and deregulation of the oil and power industries. President Arroyo’s policy priorities for her
current 6-year term, as announced in mid-2004, include creating jobs, improving education,
balancing the Government budget, reducing corruption, promoting the peace process with
rebel groups, and reforming the energy and electric power industries.
The principal sectors of the Philippine economy are services, industry and agriculture
(including fishery and forestry). The services sector accounted for 47.6% of real gross
domestic product (��GDP’’) in 2004, including the sub-sectors of trade (17.0% of real GDP),
transportation, communications and storage (8.6% of real GDP) and private services (7.7% of
real GDP). The industry sector accounted for 33.6% of real GDP in 2004, 24.4% of which
came from manufacturing. The agriculture sector accounted for 18.8% of real GDP in 2004.
In 2004, real gross national product (��GNP’’) grew 6.2% and real GDP grew 6.1%. For the first
9 months of 2005, real GNP growth was 5.4% and real GDP growth was estimated at 4.6%.
Growth has slowed due to high energy prices, fiscal tightening, mild El Nino reducing
agriculture growth and expectations of higher inflation and heightened uncertainties.
In 2004, the balance of payments recorded a deficit of $280 million, with current account
recording a surplus of $2.1 billion. The continued surplus reflected robust net inflows
throughout the year, particularly from overseas Filipino workers, which offset a decline in the
trade balance. The income account recorded a surplus of $147 million in 2004 on account of
higher remittances of Overseas Filipino Workers (��OFW’’). The balance of payments turned
into a surplus of US$2.1 billion for the 11 months of 2005 as robust OFW remittances grew a
further 27% and foreign investors turned more positive on Philippine assets.
For the 11 months of 2005, inflation averaged 7.8% which is well above the government’s fullyear target of 5–6%. Inflation in the last 3 months since September was within expectations at
7% due to easing food and energy price pressures. The improving agriculture output and
steadier Dubai crude oil import prices kept inflation relatively tame. However, apprehension
over the inflation impact of fiscal reform-related measures keeps economic policy makers
cautious. Thus, even if inflation was within BSP’s expectation, monetary policy may continue
to look at the inflation pressures for 2006 and try to protect 2007 inflation target of 4–5%. The
long monetary policy lag of 15 to 21 months would require the BSP to act again if the inflation
trajectory into 2007 would not meet the inflation target for that year. The average interest
rates for 91-day Treasury bills increased from 6.0% in 2003 to 7.3% in 2004. For the 11
months of 2005, the 3-month benchmark rate has been lower at around 6.2%. This is despite
the higher inflation rate for the same period. In the recent monetary tightening in October,
policy makers were concerned about higher than target money supply growth, 2nd round
effect, higher inflation expectations, and narrowing interest rate differentials. The US Federal
Reserve Board’s FOMC is expected to continue raising its benchmark rate until early 2006 to
around 4.5% to 4.75%. Other Asian central banks could follow. If such rate hikes continue, the
peso could react and spur the BSP to respond to the rate hikes. OFW USD inflows could
moderate the response and help mitigate the impact of narrowing differentials.
Standard & Poors, Moody’s Financial, and Fitch Ratings in July 2005 cut their credit rating
outlook on the Philippines to ��negative’’ from ��stable’’ citing concerns over the country’s ability
to maintain the fiscal consolidation needed to reduce its high debt level of public and external
indebtedness. The cut stemmed from the political crisis created in the country by allegations
of electoral impropriety by the present administration during the last elections and the
Supreme Court’s decision to issue a temporary restraining order (TRO) over the amendments
to the EVAT law which removes exemptions and increases the rate from 10% to 12% at the
discretion of the President. The election allegations culminated with the Committee on Justice
in the Lower House junking the impeachment complaints against the President. On 18
October 2005, the Supreme Court ruled with finality the constitutionality of the EVAT law, thus
15
paving the way for its implementation in November 2005. The TRO lifting will translate to the
government meeting its target budget deficit and lower borrowing costs starting 2006, and
eventually to meeting its balanced budget target by 2008, or earlier than the promised 2010.
On 29 December 2005, the peso-US dollar exchange rate was Php53.09 per US dollar,
compared to Php56.27 per US dollar as of 29 December 2004 and Php55.57 per US dollar as
of 30 December 2003.
Any deterioration in the economic conditions of the Philippines could materially and adversely
affect the Bank’s borrowers and contractual counterparties and their ability to service their
obligations to the Bank. This in turn could materially and adversely affect the Bank’s financial
condition and results of operations, including the Bank’s ability to grow its asset portfolio, the
quality of its assets, and its ability to implement its business strategy.
Considerations Relating to the Banking Industry
Competition
As of September 2005, there are 84 thrift banks operating in the Philippines, with the Bank
ranked 2nd in terms of assets. As such, the Bank is subject to significant levels of competition
in all areas of its business, including from competitors that may have greater financial or
capital resources, a greater market share or better name recognition than the Bank.
There can be no assurance that the Bank will be able to compete effectively in the face of
such competition. Increased competition may likewise make it difficult for the Bank to increase
the size of its loan portfolio and low cost deposit base, as well as cause pricing competition
which could have a material adverse effect on the Bank’s growth plans, margins, results of
operations and financial condition.
BSP Regulations on Loan Loss Provisioning
BSP regulations require Philippine banks to classify non-performing loans based on 4 different
categories: (i) Loans Especially Mentioned, (ii) Substandard, (iii) Doubtful, and (iv) Loss. The
standards under these regulations have in the past, and may in the future, change and may
result in changes in the classification of certain loans as well as the level of loan loss
provisions which the Bank makes. In addition, these requirements in certain circumstances
may be less stringent than those applicable to banks in other countries and may result in
particular loans being classified as non-performing later than would be required in such
countries or being classified in a category reflecting a lower degree of risk.
Accounting Principles
The Bank is preparing itself for the implementation of new accounting standard Philippine
Accounting Standard (PAS) 39 through the establishment of a task force that will implement
its provisions. To date, the Bank has not yet determined the total impact of these standards
on the financial statements since it is still in the process of updating its system, processes
and policies, which will incorporate the requirements of PAS 39. The Bangko Sentral ng
Pilipinas (BSP), through the BSP Monetary Board, Resolution No. 1869 dated 23 December
2004 has given banks and financial institutions until 31 December 2005 to ready their
infrastructures to be PAS 39 compliant. Interim reports that will be submitted to the BSP for
2005 need not be in compliance with provisions of said standards.
Anti Money Laundering Act of 2001
The Bank is regulated and supervised principally by, and has reporting obligations to, the
BSP. The Bank is also subject to the banking, corporate, taxation and other laws in effect in
the Philippines. In recent years, existing rules and regulations have been modified, new rules
and regulations have been enacted and reforms have been implemented which are intended
16
to provide tighter control and added transparency in the Philippine banking sector. These
rules include new guidelines on the monitoring and reporting of suspected money laundering
activities as well as regulations governing capital adequacy of banks in the Philippines.
Furthermore, the Philippines enacted the Anti-Money Laundering Act of 2001 (��AMLA’’) to
introduce more stringent anti-money laundering regulations and became compliant with the
standards set by the Financial Action Task Force (��FATF’’) in 2003. The Bank may incur
substantial compliance and monitoring costs if further rules or regulations are enforced, or if
existing regulations are enforced on a more stringent basis.
Taxation
Currently, Philippine banks and non-bank financial intermediaries are subject to the Gross
Receipts Tax (GRT). Section 108 of the Tax Code of 1997 as amended by R.A. 9337 imposes
GRT on income derived by all banks and non-bank financial intermediaries.
The Philippine banking industry also faces the threat of the Bureau of Internal Revenue
(��BIR’’) imposing new tax regulations that could result in the Bank’s taxation charge being
increased considerably, which may have a material adverse effect on the financial condition
and results of operations of the Bank.
On 24 May 2005, President Gloria Macapagal-Arroyo signed into law the Republic Act No.
9337 known as ��The New VAT Law’’. The law became effective on 1 November 2005.
The new VAT law has introduced major provisions not only regarding value-added taxes but
also on corporations’ income taxes and gross receipt taxes. Presented below are the salient
features of the new VAT law, as applicable with the operations of the Bank.
.
The income tax rate applicable for domestic corporations was increased to 35.00% from
the lower 32.00% income tax rate for the taxable years 2005–2008. Effective 1 January
2009, the rate of income tax shall be 30.00%.
.
The new 35.00% corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.
.
The percentage by which the taxpayer’s allowable deduction for interest expense shall
be reduced, has been increased from 38.00% to 42.00% of the interest income subjected
to final tax. Effective 1 January 2009, the percentage of allowable deduction shall be
33.00%, when the rate of income tax goes down to 30.00%.
.
The gross receipts tax (GRT) rate for banks and non-bank financial intermediaries
performing quasi-banking functions is increased to 7.00% from 5.00% for: Royalties,
rentals of property, profits from exchange and other items treated as gross income under
Section 32 of the 1997 Tax Code. Likewise, GRT at the rate of 7.00% is applicable on net
trading gains within the taxable year on foreign currency, debt securities and other
similar financial instruments.
Basel II
Continuing initiatives to build up its risk management capabilities should enable the Bank to
comply with the new standards that will be required upon Basel II implementation.
Under Basel II, universal banks, commercial banks, and thrift banks are expected to comply
with the standardized approach for credit risk, and the basic indicator or standardized
approaches for operational risk by 2007. By 2010, these banks may move to the foundation
internal ratings based (IRB) or advanced IRB approaches for credit risk, and advanced
measurement approaches for operational risk. Between now and 2007, certain provisions of
Basel II will be gradually incorporated into the current risk-based capital adequacy framework,
including lower risk weights for highly-rated corporate exposures, higher risk weights for past
17
due claims (net of specific provisions), standardized approach for investments in securitization
structures (i.e., risk weights would depend on external ratings), standardized computation of
liquidity risk and interest rate risk in the banking book, and broad guidelines on operational
risk management. The rest of the provisions of Basel II standardized approach for credit risk,
and basic indicator and standardized approaches for operational risk will be implemented by
2007.
The Bank currently has a Risk Management Unit that closely works with its policy-setting Risk
Management Committee. Key officers have been assigned to monitor the Bank’s market,
credit and operational risks. The Bank’s risk policies and credit models are regularly reviewed
to ensure that they remain adequate in the nature of risks dealt with.
The Bank aims to become a Basel compliant institution and obtain proper risk management
capabilities consistent with its business risk aspirations. Working towards qualifying for Basel
Advanced IRB status by 2010, the Bank’s Risk Management Committee shall ensure the
establishment of a risk management infrastructure that integrates all phases of customer
management. The Basel exercise shall be focused on staffing for analytics, data build-up and
quality, data capture and systems, and risk controls.
Considerations Relating to the Bank
Significant Shareholding by Metrobank
A significant portion of the equity of the Bank (approximately 74.24%) is owned by Metrobank.
The next largest shareholder is the Dolor Family, which owns 19.77% of the Bank. There can
be no assurance that the interests of Metrobank will necessarily coincide with the interests of
the Noteholders.
Concentration of Loan Portfolio
As of 30 September 2005, the Bank’s top 10 largest exposures account for 13.59% of the
Bank’s total loan portfolio. The next 10 largest exposures account for an additional 4.04% of
the loan portfolio. While there are currently no non-performing loans (��NPLs’’) in the top 10
exposures, there can be no assurance that these exposures would continue to perform their
obligations to the Bank.
High Level of Regulation
The Bank, being subject to the supervision and regulation of the BSP, is periodically audited
by the BSP through the appropriate Supervision and Examination Sector for compliance with
banking rules and regulations. While the Bank believes that as of 30 September 2005, it is
fully compliant with all applicable rules and regulations and has effectively and efficiently
implemented all corrective actions required, if any, to the satisfaction of the BSP, there can be
no assurance that the Bank will at all times be compliant or that the BSP will find the
operations or corrective measures taken by the Bank to be proper, acceptable or sufficient. In
such cases, the Bank could be reprimanded, fined, or in extreme cases, have its banking
license revoked, but at all times after due notice and hearing.
Level of Non-Performing Loans
The current level of the Bank’s NPLs at 6.28% as of September 2005 compares favorably with
the industry average of 9.10% among thrift banks in the Philippines. Through the
implementation of stringent credit policies, the Bank expects its NPLs to further taper off.
Ongoing volatile economic conditions in the Philippines may adversely affect the ability of the
Bank’s borrowers to service their indebtedness and as a consequence the Bank may
experience an increase in NPLs and provisions for probable losses. Although the Bank
monitors closely current and future credit risk exposures, no assurance can be given that the
amount of NPLs will not increase and will not have a material effect on the Bank’s capital
adequacy ratio, its operations, and financial condition.
18
Accounting Principles
The Bank’s financial position and results of operations will be affected by the implementation
of new Philippine Accounting Standards. The Bank’s results of operations and financial
position have been, and will continue to be, affected by certain changes to Philippine GAAP,
which are intended to align Philippine GAAP further with International Financial Reporting
Standards (IFRS). With the adoption of the new accounting standards effective 1 January
2005, the Bank shall be fully converted and aligned with IFRS except in certain aspects. See
Summary of Significant Differences between International Financial Reporting Standards and
Philippine Generally Accepted Accounting Principles. With effect from 1 January 2005, the
Bank is required to adopt these new accounting standards which may have a significant effect
on its financial position and results of operations. In particular, Philippine Accounting
Standards (PAS) 39 which establishes the accounting and reporting standards for
recognizing and measuring the Bank’s financial assets and financial liabilities and derivative
instruments (including derivatives and derivative-like provisions embedded in non-derivative
contracts) will result in a reduction of surplus as of 1 January 2005.
With the exception of PAS 32 and 39, all of the new accounting standards will be retroactively
applied. The Bank, however, has not yet determined the effect of adopting these new
accounting standards. See Selected Financial Information. As a result, the financial
statements for the years ended 31 December 2002, 2003 and 2004 included in this
Offering Circular have not yet been restated to reflect the adoption of the new standards. The
Bank expects that the main adjustment will be in respect of surplus, however, such adjustment
cannot currently be quantified. In addition, in accordance with Philippines Securities and
Exchange Committee (the ��Philippine SEC’’) Memorandum Circular No. 19 dated 22
December 2004, interim financial statements in 2005 for purposes of submission to
Philippine SEC need not reflect the adoption of these new accounting standards.
Accordingly, the financial statements for the nine months ended 30 September 2004 and
2005 included in this Offering Circular have not been adjusted to effect the implications of the
new accounting standards. As required by the Philippine SEC, the financial statements for the
year ending 31 December 2005 should fully comply with Philippine GAAP aligned with IFRS.
There may be material differences between the interim financial statements and the financial
statements for the year ending 31 December 2005. The Bank’s financial results for
subsequent periods may be adversely affected by the effect of the new accounting
standards, which may also have an adverse effect on the trading price and liquidity of the
Notes.
Considerations Relating to the Notes
Unsecured Subordinated Notes
The Notes will constitute direct, unconditional, unsecured and subordinated obligations of the
Bank, and will at all times, rank pari passu and without any preference among themselves and
at least equally with all other present and future unsecured and subordinated obligations of
the Bank.
The Notes are not deposits and are not guaranteed nor insured by the Bank or any party
related to the Bank, such as its subsidiaries, if any, or affiliates or the Philippine Deposit
Insurance Corporation, or any other person.
In the event of any insolvency or liquidation of the Bank, the claims of Noteholders will be
subordinated in right of payment to the prior payment in full of all liabilities (actual or
contingent, present or future) of the Bank including all deposit liabilities and other liabilities of
the Bank and all offices and branches of the Bank except those liabilities which by their terms
rank equal with or junior to the Notes. However, the claims of Noteholders will have priority
over the rights and claims of holders of all classes of equity securities of the Bank, including
holders of preference shares, if any.
19
Limitation as to Use as Collateral
The Notes may not be used as collateral for any loan made by the Bank or its subsidiaries, if
any, or its affiliates. The Noteholders are not allowed to set off any amount that may be due to
the Bank against the Notes.
Limited Right to Accelerate
If the Bank fails to make a payment on the Notes when due, the Noteholders thereof may not
accelerate payment of such Notes. However, the Noteholders may institute proceedings to
enforce the obligations of the Bank to make such payment and may institute proceedings for
the insolvency and liquidation of the Bank. The Noteholders may accelerate the Notes only if
an insolvency or liquidation proceeding is commenced by or against the Bank or upon the
occurrence of other certain related events. See Terms and Conditions of the Notes.
Limitation on Transfers
The Notes may be issued or transferred to any person of legal age, regardless of nationality
or residency, or any corporation, association, partnership, trust account, fund, or entity,
regardless of place of incorporation or domicile, subject to submission of the appropriate
documents to the Registry.
The following persons and entities are prohibited from purchasing and/or holding any Notes of
the Bank: (1) subsidiaries, if any, and affiliates of the Bank, including the subsidiaries and
affiliates of the Bank’s subsidiaries, if any, and affiliates; or (2) common trust funds/unit
investment trust funds managed by the Trust Department of the Bank, its subsidiaries, if any,
and other related entities; or (3) other funds being managed by the Trust Department of the
Bank, its subsidiaries, if any, affiliates or other related entities where (a) the fund owners have
not given prior authority or instruction to the Trust Department to purchase or invest in the
Notes or (b) the authority or instruction of the fund owner and his understanding of the risk
involved in purchasing or investing in the Notes are not fully documented. For purposes
hereof, an ��affiliate’’ refers to a related entity that is linked by means of ownership of at least
20.00% to not more than 50.00% of its outstanding voting stock.
The Registry is authorized to refuse any transfer or transaction in the Registry Book which
may be violative of these restrictions. There is no assurance that the secondary trading of the
Notes may not be affected given these restrictions.
Transfer of the Notes between persons of different tax status shall be made effective only on
an Interest Payment Date (the ��Transfer Date’’). Any change in tax status shall be recorded
only upon submission of: (x) written notification of the transfer from the transferor; and (y) a
sworn statement of the tax status of the transferee claiming tax exemption/preferential tax
treatment and other Tax Exempt/ Tax Treaty Documents from such transferee, to the Issuer,
through the Registry.
Such change in tax status shall take effect beginning on the 1st day of the Interest Period
subsequent to the Transfer Date; provided that notification is made and sufficient Tax Exempt/
Treaty Documents are sent to the Issuer, through the Registry no later than 5 Banking Days
prior to the record date of such Interest Period, otherwise, the Registry shall be entitled to
presume, without liability to the Issuer, that the relevant Noteholder/ Transferee is not taxexempt or does not enjoy preferential tax treatment. In such case, the change in tax status
arising from the transfer between a taxable and a tax-exempt individual shall take effect
starting from the Interest Period of the relevant record date on or before which a written
notification and submission of the Tax Exempt/Tax Treaty Documents are made which should
be no later than 5 Banking Days prior to the relevant record date.
In determining and recording such tax status, the Registry shall exercise such judgment and
care, under the circumstances then prevailing that individuals of prudence, discretion and
intelligence and familiar with such matters exercise in the management of their own affairs.
20
Liquidity of the Notes
There is no existing established market for the Notes. The Lead Manager and the Selling
Agents have made no commitment and have no obligation to make a market in the Notes. No
assurance can be given that the Lead Manager or the Selling Agents will actually make a
market in the Notes, or if it does, that it will continue to make a market in the future.
Ultimately, no assurance can be given that an active trading market for the Notes will develop
or will be maintained throughout the life of the Notes.
Taxation of the Notes
Interest income on the Notes held by Noteholders shall be subject to a final withholding tax of
20.00% or such rate as may be provided by law or regulation, which shall be withheld at
source. Interest income received by non-resident individuals not engaged in trade or business
in the Philippines shall be subject to a final withholding tax of 25.00%. Interest income
received by non-resident foreign corporations shall be subject to a final withholding tax of
35.00%. The tax shall be for the account of the affected Noteholder, and shall be withheld at
source. The foregoing rates may be subject to further reduction by any applicable tax treaty.
However, under the Tax Code, interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments with a maturity period of not less than 5
years, the form of which shall be prescribed by the BSP and issued by banks only (not by
non-bank financial intermediaries and finance companies) to individuals in denominations of
P10,000.00 and other denominations as may be prescribed by the BSP, is exempt from
income tax. Provided that, should the holder pre-terminate the deposit or investment before
the 5th year, a final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
4 years to less than 5 years — 5.00%;
3 years to less than 4 years — 12.00%; and
Less than 3 years — 20.00%.
Thus, all payments of principal and interest in respect of individual Noteholders who are (i)
Philippine citizens; (ii) resident aliens; and (iii) non-resident aliens engaged in trade or
business within the Philippines, shall be made free and clear of, and without withholding or
deduction for, any taxes, duties, assessments, or governmental charges of whatever nature
imposed, levies, collected, withhold, or assessed by or within the Philippines or any authority
therein or thereof having the power to tax, unless such withholding or deduction is required by
law. In such event, the Bank shall pay such additional amount as will result in the receipt by
such Noteholders of such amounts as would have been received by them had no such
withholding or deduction been required.
In accordance with Clause D(7)(e) of the BSP Rules, negotiations/transfers from one holder to
another do not constitute pre-termination.
If tax status being claimed by an applicant is ��exempt’’ or ��reduced tax treaty rates’’, the
following documents should be presented or attached to the application:
(i)
Certified true copy of the original tax exemption certificate, ruling or opinion issued by
the Bureau of Internal Revenue on file with the Applicant as certified by its duly
authorized officer;
21
(ii)
With respect to tax treaty relief, proofs to support applicability of reduced treaty rates,
consularized proof of tax domicile issued by the relevant tax authority of the Noteholder
and original or SEC-certified true copy of the SEC confirmation that the relevant entity is
not doing business in the Philippines;
(iii) Original of the duly notarized undertaking, in the prescribed form, declaring and
warranting its tax exempt status or entitlement to reduced tax treaty rates, undertaking
to immediately notify the Issuer and the Registry and Paying Agent of any suspension or
revocation of its tax exempt status or treaty privileges and agreeing to indemnify and
hold the Issuer and the Registry and Paying Agent free and harmless against any claims,
actions, suits, and liabilities resulting from the non-withholding or reduced withholding of
the required tax; and
(iv) Such other documentary requirements as may be required under the applicable
regulations of the relevant taxing or other authorities which, for purposes of claiming
tax treaty withholding rate benefits, shall include evidence of the applicability of a tax
treaty and consularized proof of the Noteholder’s legal domicile in the relevant treaty
state.
Rating of the Notes
The Notes have been rated Aa plus by PhilRatings. This rating will be subject to regular
annual reviews, or more frequently as market developments may dictate for as long as the
bonds are outstanding. A rating is not a recommendation to buy, sell or hold securities and
may be subject to revision, suspension or withdrawal at any time by the assigning rating
organization. There is no assurance that the rating will be maintained throughout the life of
the Notes.
Under the ratings definition of PhilRatings, being included within the PRS Aa plus class of
ratings indicates that the Bank has a strong capability to pay its debt issue. A PRS Aa plus
rating means that margins of protection may not be as large as in PRS Aaa issues.
Fluctuations of protective elements may be of greater amplitude or there may be other
elements present, which make the long-term risks, appear somewhat larger than for PRS Aaarated securities.
In assigning the rating, PhilRatings considered the Bank’s market position as one of the
leading players in the attractive consumer-banking sector, solid support from parent
Metrobank and synergies realized from being part of the Metrobank Group, and
management’s focused vision and coherent strategy. PhilRatings likewise took into account
the Bank’s strong core earnings, its good asset quality, sound funding base, and acceptable
capitalization level.
Registry Fees
The Registry shall charge an annual maintenance fee of 0.04% per annum based on the face
value of the Notes which shall be deductible from the Interest Payment. Should the Notes be
subsequently transferred, a minimal fee shall be charged by the Registry.
22
TERMS AND CONDITIONS OF THE NOTES
The following do not purport to be a complete listing of all the rights, obligations, and
privileges of the Notes. Some rights, obligations, or privileges may be further limited or
restricted by other documents. Prospective investors are encouraged to carefully review the
Agreements, other information in this Offering Circular, and all amendments thereto.
Master Note
Philippine Savings Bank (the ��Issuer’’) hereby promises to pay the holders of its Unsecured
Subordinated Notes (the ��Notes’’) the principal and interest due on the Notes under the
following terms and conditions:
Total Amount
P
= 2,000,000,000.00.
Denomination
Minimum of P
= 500,000.00 and in increments of PhP100,000.00.
Governing Regulation
Bangko Sentral ng Pilipinas (BSP) Memorandum to All Banks and
Non-Bank Financial Institutions dated 17 February 2003 and
Circular No. 280 (2001) on the issuance of unsecured
subordinated debt instruments eligible as Tier 2 capital and other
related circulars and issuances, as may be amended from time to
time (BSP Rules).
Issue Price
100.00% of the face value of each Note.
Offer Period
The period when the Notes were offered for sale by the Issuer
through the Selling Agents to prospective Eligible Noteholders,
which commenced on the start of business hours of 11 January
2006 and ended on the close of business hours on 20 January
2006.
Issue Date
27 January 2006.
Settlement Date
27 January 2006.
Purpose of Issuance
To raise Tier 2 capital to increase and strengthen its capital base.
Interest
The Interest Rate (or Step-Up Interest Rate) multiplied by the face
value of the Note, multiplied by the actual number of days lapsed
in the given Interest Period (which shall be from and including the
first day of the Interest Period up to but excluding the last day of
such Interest Period), divided by 360 days.
Interest Rate
10.00% per annum, payable to the Noteholder for the period from
and including the Issue Date up to but excluding 27 January 2011
(if the Call Option is not exercised) or the Call Option Date (if the
Call Option is exercised).
Interest Periods
Consecutive three (3) calendar month period reckoned from the
Issue Date up to the 27th of April 2006, and every 27th of the
succeeding three (3) calendar month periods thereafter, until the
Maturity Date, except that if the last day of a given period is not a
Banking Day, then the given period is extended to the immediately
following Banking Day.
Interest Payment Date
The last day of an Interest Period.
23
Step-Up Interest Rate
5-Year Mart1 FXTN as of Reset Date multiplied by 80.00%, plus
the Step-Up Credit Spread, payable to the Noteholder in lieu of the
Interest Rate beginning on the twenty-first (21st) Interest Period up
to the last Interest Period in the event that the Issuer does not
exercise the Call Option.
Step-Up Credit Spread
150.00% x {Interest Rate – (5-Year Mart1 FXTN as of Issue Date x
80.00%)}, which is equivalent to 4.2815%.
Reset Date
27 January 2011.
5-Year Mart1 FXTN as
of Issue Date
8.9321%, which is the rate for the Money Market Association of
the Philippines Philippine Treasury Notes Benchmark for notes
with the time to maturity equal to 5 years, appearing on the
Bloomberg Page MART1 under the heading ��Bid Yield’’ as of
11 : 16 a.m., Manila time, on the last Banking Day of the Offer
Period, which is 20 January 2006.
5-Year Mart1 FXTN as
of Reset Date
The rate for the Money Market Association of the Philippines
Philippine Treasury Notes Benchmark for notes with the time to
maturity equal to 5 years, appearing on the Bloomberg Page
MART1 under the heading ��Bid Yield’’ as of 11 : 16 a.m., Manila
time, on the Banking Day immediately prior to the Reset Date.
If there is no rate appearing on the Bloomberg Page MART1 under
the heading ��Bid Yield’’ as of 11 : 16 a.m., Manila time, on the
Banking Day immediately prior to the Reset Date, the Public
Trustee will request appropriate quotes for bid yields for a 5-Year
FXTN from 4 reference banks (which shall be selected by the
Public Trustee) and will determine the arithmetic mean of these bid
yields (rounded upwards, if necessary, to the nearest onesixteenth of one per cent) provided that at least 3 rates are so
quoted.
Payment
Any payment of principal or interest under the Notes shall be
made through the Paying Agent based solely on the records of the
Registry.
Penalty Interest
1.00% per month on the defaulted amount payable to the
Noteholder from the time the amount fell due until it is fully paid
which will be in addition to the Interest Rate (Step-Up Interest
Rate).
Call Option
On the Call Option Date, upon (x) prior approval of the BSP
subject to the following conditions: (i) the capital adequacy ratio of
the Issuer is at least equal to the required minimum ratio; (ii) the
Note is simultaneously replaced with the issues of new capital
which are neither smaller in size nor lower in quality than the
original issue; and (y) 30-day prior written notice to the then
Noteholder on record, all and not less than all of the outstanding
Notes may be redeemed at the instance of the Issuer by paying
the Noteholder the Call Option Amount.
Call Option Date
The day when the Call Option is exercised by the Issuer which day
shall be the 1st Banking Day after 27 January 2011.
Call Option Amount
The face value of the Note, plus accrued Interest covering the 20th
Interest Period at the Interest Rate as of but excluding the Call
Option Date.
24
Maturity Date
27 January 2016.
Maturity Value
The Notes will be redeemed on Maturity Date at their face value
plus unpaid accrued applicable Interest.
Non-Preterminability
The Notes shall not be redeemable or terminable at the instance of
any Noteholder before Maturity Date, unless otherwise expressly
provided herein.
Form
The Notes will be issued scripless and will be maintained in
electronic form with the Registry, subject to the payment of fees to
the Registry. However, a Registry Confirmation will be issued by
the Registry in favor of the Noteholders in accordance with the
BSP Rules.
Registry & Paying
Agent
Development Bank of the Philippines — Trust Services Department
Public Trustee
Development Bank of the Philippines — Trust Services Department
Selling Agents
ING Bank N.V., Manila Branch (��ING’’), Multinational Investment
Bancorporation, and, to a limited extent, Philippine Savings Bank
Eligible Noteholders
The Notes may be issued or transferred to any person of legal
age, regardless of nationality or residency, or any corporation,
association, partnership, trust account, fund or entity, regardless of
place of incorporation or domicile, subject to the submission of the
appropriate documents to the Registry & Paying Agent.
Noteholders
The Eligible Noteholders who are actual holders of the Notes.
Prohibited Noteholders
The following persons and entities shall be prohibited from
purchasing and/or holding any Notes of the Issuer: (1)
subsidiaries and affiliates of the Issuer, including the subsidiaries
and affiliates of the Issuer’s subsidiaries and affiliates; or (2)
common trust funds/unit investment trust funds managed by the
Trust Department of the Issuer, its subsidiaries, and affiliates, or
other related entities; or (3) other funds being managed by the
Trust Department of the Issuer, its subsidiaries and affiliates or
other related entities where (a) the fund owners have not given
prior authority or instruction to the Trust Department to purchase
or invest in the Notes or (b) the authority or instruction of the fund
owner and his understanding of the risk involved in purchasing or
investing in the Notes are not fully documented. For purposes
hereof, an ��affiliate’’ refers to a related entity linked by means of
ownership of at least 20.00% to not more than 50.00% of its
outstanding voting stock.
Market Makers
ING and MIB shall initially perform the functions and duties of the
Market Maker pursuant to the BSP Rules. When the Philippine
Dealing & Exchange Corp. (PDEx) becomes operational as the
fixed-income exchange for these Notes, the Issuer intends to list
the Notes in PDEx. Upon listing of the Notes in PDEx, ING and
MIB shall cease to act as Market Maker.
25
Secondary Trading
All secondary trading of the Notes shall be coursed through the
Market Maker, other Selling Agents authorized by the BSP or
PDEx (upon the listing of the Notes in PDEx), subject to the
payment by the Issuer of the corresponding listing fees, and
payment by the relevant Noteholder of the proper fees, if any, to
the Market Maker or PDEx, and the Registry.
Transferability
Negotiations or transfers of the Notes to one other than the Issuer
prior to Maturity Date shall not constitute pre-termination. Each
Selling Agent (in the case of initial issuance of the Notes) and
Market Maker (in the case of negotiations/transfers of the Notes)
shall verify the identity and other relevant details of each investor
and ascertain that the proposed Noteholder or transferee of a Note
is an Eligible Noteholder and is not a Prohibited Noteholder. Final
determination shall, however, vest with the Issuer.
Qualification
Determination
The Eligible Noteholder shall immediately submit any and all
information reasonably required by the Selling Agents and/or
Market Makers with respect to the qualification of the proposed
Noteholder or transferee in order to determine that such Eligible
Noteholder or transferee is an Eligible Noteholder and is not a
Prohibited Noteholder.
Status and
Subordination
The Notes will constitute direct, unconditional, unsecured, and
subordinated obligations of the Issuer. Claims of all the
Noteholders in respect of the Notes will at all times rank pari
passu without any preference among themselves.
However, claims of all Noteholders will enjoy priority over the
rights and claims of holders of all classes of equity securities of
the Issuer, including holders of preference shares, if any.
Noteholders or their transferees shall not be allowed, and hereby
waive their right, to set off any amount that may be due the Issuer
against the Notes.
Upon any distribution to creditors of any assets of the Issuer in the
event of any insolvency or liquidation of the Issuer, the claims of
Noteholders for principal and interest in respect of the Notes shall
be subordinated in right of payment to claims (whether actual or
contingent, present or future) of all depositors and creditors of the
Issuer, except those creditors that are expressly ranked equally
with or junior to the Noteholders in right of payment.
The Notes, like other subordinated indebtedness of the Issuer, are
subordinated to the claims of depositors and ordinary creditors,
are not a deposit, and are not guaranteed nor insured by the
Issuer or any party related to the Issuer, such as its subsidiaries
and affiliates, or the Philippine Deposit Insurance Corporation, or
any other person. The Notes shall not be used as collateral for any
loan made by the Issuer or any of its subsidiaries or affiliates.
26
Representations and
Warranties
The Issuer hereby represents and warrants to the Noteholders, as
follows:
(a)
Corporate existence.
The Issuer is a corporation duly organized, validly existing, and in
good standing under and by virtue of the laws of the Republic of
the Philippines, is registered or qualified to do business in every
jurisdiction where registration or qualification is necessary, and
has the corporate power and authority to conduct its business as
presently being conducted and to own its properties and assets
now owned by it as well as those to be hereafter acquired by it for
the purpose of its business, to incur the indebtedness and other
obligations provided for in the Notes.
(b)
Corporate Approvals and Registrations.
All corporate authorizations, approvals, and other acts legally
necessary for the offer and issuance of the Notes, for the
circulation of the Preliminary and Final Offering Circulars and for
the Issuer to enter into and comply with its obligations under the
Notes, have been obtained or effected.
(c)
Government Approvals.
All government authorizations, approvals, rulings, registrations,
and other acts legally necessary for the offer, issuance, and
payment of the Notes, their terms, as may be amended or
supplemented, and for the Issuer to enter into and comply with
its obligations under the Notes, have been obtained and remain
valid.
(d)
Compliance with Conditions.
All conditions imposed or required under the BSP Rules, as well
as regulations of the Bureau of Internal Revenue and other
relevant agencies, in respect of the offer, issuance, and payment
of the Notes, have been or will be complied with by the Issuer as
of the date and/or time that they are required to be complied with.
(e)
Documents/Information.
None of the information, data, or submissions made by the Issuer,
including those made available to the Noteholders, in connection
with the Notes violate any statute or any rule or regulation of any
government agency or office, and do not contain any untrue or
misleading statement of a material fact, or omit any material fact
necessary or required to be stated.
(f)
Obligations under the Notes.
The obligations of the Issuer under the Notes, when issued,
constitute the Issuer’s legal, valid, binding, direct, and
unconditional obligations, enforceable in accordance with their
terms, and the compliance by the Issuer with its obligations under
the Notes will not conflict with, nor constitute a breach or default
of, the articles of incorporation, by-laws, or any resolution of the
board of directors of the Issuer, or any rights of the stockholders of
the Issuer, or any contract or other instrument by which the Issuer
is bound, or any law, regulation, or judgment or order of any office,
agency, or instrumentality applicable to the Issuer.
27
(g)
Compliance with Law.
The Issuer is compliant with all Philippine laws, statutes,
regulations, and circulars, including without limitation the
circulars, rules, regulations, and orders issued by the BSP.
(h)
Compliance with Banking Laws/Regulations.
The Issuer has all authorizations, approvals, permits, licenses, and
privileges from all governmental and regulatory bodies necessary
to carry on its banking business and operations as well as those of
its subsidiaries and affiliates as currently conducted; has not
violated any of the terms and conditions of such authorizations,
approvals, permits, and licenses; and will have free and continued
use and exercise thereof.
(i)
Compliance with BSP.
The Issuer has complied with, corrected, and successfully and
effectively implemented, to the satisfaction of the BSP, all final
findings and recommendations of the BSP resulting from all past
audits and examinations conducted by the BSP on the Issuer.
(j)
Litigation.
There are no legal, administrative, or arbitration actions, suits, or
proceedings pending or threatened against or affecting the Issuer
which, if adversely determined, would have a material adverse
effect on the business operations, properties, assets, or financial
conditions of the Issuer, or which enjoin or otherwise adversely
affect the execution, delivery, or performance of the Notes, or its
offer or issuance.
(k)
Financial Statements.
The audited financial statements of the Issuer are in accordance
with the books and records of the Issuer, are complete and correct
in all material respects, have been prepared in accordance with
generally accepted Philippine accounting principles and practices,
and fairly represent the Issuer’s financial condition and results of
operations. There has been no material change in the financial
condition or results of operations of the Issuer sufficient to impair
its ability to perform its obligations under the Notes according to
their terms.
(l)
Material Obligations.
The Issuer has, as of the date hereof, no liabilities or obligations
of any nature, whether accrued, absolute, contingent, or otherwise,
including but not limited to tax liabilities due or to become due,
and whether incurred in respect of or measured by any income for
any period prior to such date or arising out of transactions entered
into or any state of facts existing prior thereto, which may in any
case or in the aggregate, materially and adversely affect the
Issuer’s ability to discharge its obligations under the Notes.
28
(m) Change in Financial Condition.
Since issuance of the various approvals by the relevant
government agencies for the offer or issuance of the Notes,
there has been no change in the financial condition, assets, and
liabilities of the Issuer, other than changes that do not, either in
any case or in the aggregate, materially and adversely affect the
Issuer’s ability to discharge its obligations under the Notes.
(n)
Default.
No event has occurred and is continuing which constitutes a
default by the Issuer under or in respect of any agreement binding
upon the Issuer, and no event has occurred which, with the giving
of notice, lapse of time, or other condition, would constitute a
default by the Issuer under or in respect of such agreement, which
default shall materially affect the Issuer’s ability to comply with the
Notes and pay the principal and interest that may be due on the
Notes.
(o)
Title to Property.
The Issuer has good and marketable title to all its properties, free
and clear of liens, encumbrances, restrictions, pledges,
mortgages, security interest, or charges.
(p)
Compliance with Law/Taxes.
The Issuer is conducting its business and operations in
compliance with the applicable laws and regulations, has filed
true, complete, and timely tax returns, and has paid all taxes due
in respect of the ownership of its properties and assets or the
conduct of its operations, except to the extent that the payment of
such taxes is being contested in good faith and by appropriate
proceedings.
(q)
Insurance.
The Issuer maintains insurance with responsible and reputable
insurance companies in such amounts, covering such risks, and
under such terms and conditions, as are prudent and appropriate
and as are usually carried by companies engaged in similar
business and owning similar properties in the same geographical
areas as those in which the Issuer operates.
(r)
Auditor.
The Issuer maintains the services of a responsible and reputable
external auditor.
(s)
Offering Circular.
The Preliminary and Final Offering Circulars issued in connection
with the Notes present a fair, complete, and accurate description
of the Issuer, the Notes, and the considerations that any investor
in the Notes needs to know before making an informed decision to
invest in the Notes.
These representations and warranties are true and correct as of
the Issue Date and shall remain true and correct as long as the
Notes or any portion thereof remain outstanding.
29
Affirmative Covenants
The Issuer hereby covenants and agrees that, for as long as the
Notes remain outstanding:
(a)
Payment of Taxes and Lawful Claims.
The Issuer shall pay and discharge all taxes, assessments, and
government charges or levies imposed upon it or upon its income
or profits or upon any properties belonging to it prior to the date on
which penalties are assessed; pay and discharge when due all
lawful claims which, if unpaid, might become a lien or charge upon
any of its properties; and take such steps as may be necessary in
order to prevent its properties from being subjected to the
possibilities of loss, forfeiture, or sale; provided, that the Issuer
shall not be required to pay any such tax, assessment, charge,
levy, or claim which is being contested by it in good faith and by
proper proceedings or as could not reasonably be expected to
have a material adverse effect on its condition, business, or
properties; provided, that in the case of a tax, assessment, charge,
levy, or claim which is being contested in good faith and by proper
proceedings, the Public Trustee shall be notified by the Issuer
within 30 days from the date of the receipt of written notice of the
resolution of such proceedings.
(b)
Corporate Existence.
The Issuer shall preserve and maintain its corporate existence.
(c)
Financial Records.
The Issuer shall maintain adequate financial records and prepare
all financial statements in accordance with generally accepted
accounting principles and practices in the Philippines consistently
applied and in compliance with the regulations of the government
body having jurisdiction over it, and, subject to receipt of a written
request within a reasonable period before the proposed date of
inspection, permit the Public Trustee or its duly designated
representatives to inspect the books of accounts and records
pertinent to the compliance by the Issuer of its obligations under
the Notes.
(d)
Compliance with Laws/Contracts.
The Issuer shall comply with all the requirements, terms,
covenants, conditions, and provisions of all laws, rules,
regulations, orders, writs, judgments, indentures, mortgages,
deeds
of
trust,
agreements,
and
other
instruments,
arrangements, obligations, and duties to which it, its business, or
its assets are legally bound, where non-compliance would have a
material adverse effect on the business, assets, condition, or
operations of the Issuer, or would materially and adversely affect
the Issuer’s ability to duly perform and observe its obligations and
duties under the Notes.
30
(e)
Compliance with BSP Rules.
The Issuer shall fully and promptly comply with all final BSP
directives, orders, issuances, and letters, including those regarding
its capital, licenses, risk management, and operations; promptly
and satisfactorily take all corrective measures that may be
required under BSP audit reports; and promptly furnish the
Public Trustee with a copy of all the audit reports of, and its
submissions to, the BSP.
(f)
Use of Proceeds.
The Issuer shall use the net proceeds from the Notes to raise Tier
2 capital to increase and strengthen its capital base
(g)
Performance of Obligations.
The Issuer shall promptly and satisfactorily pay all indebtedness
and other liabilities and perform all contractual obligations
pursuant to all agreements to which it is a party or by which it
or any of its properties may be bound, except those being
contested in good faith and by proper proceedings or as could
not reasonably be regarded to have a material adverse effect on
its business, assets, condition, or operations.
(h)
Performance of Obligations under the Notes.
The Issuer shall pay all amounts due under the Notes at the times
and in the manner specified in, and perform all its obligations,
undertakings, and covenants under the Notes.
(i)
Audited Financial Statements.
The Issuer shall, as soon as available and in any event within 120
days after the end of each fiscal year of the Issuer, or at such later
date on which it makes such information publicly available, furnish
the Noteholders through the Public Trustee with audited financial
statements, consisting of the balance sheet of the Issuer as of the
end of such fiscal year and statements of income and retained
earnings and of the source and application of funds of the Issuer
for such fiscal year, such audited financial statements being
prepared in accordance with generally accepted accounting
principles and practices in the Philippines consistently applied
and being certified by an independent certified public accountant
of recognized standing in the Philippines; and shall furnish the
Public Trustee no later than 45 days from the end of each
calendar quarter with its quarterly financial statements; and shall
further furnish the Public Trustee within 10 days from written
request with such updates and information as may be reasonably
requested by the Public Trustee pertaining to the business, assets,
condition, or operations of the Issuer, or affecting the Issuer’s
ability to duly perform and observe its obligations and duties under
the Notes.
31
(j)
Notice of Litigation and Other Matters.
The Issuer shall give to the Noteholders through the Public
Trustee written notice of: (i) all assessments, litigation, or
administrative or arbitration proceedings before or of any court,
tribunal, arbitrator, or governmental or municipal authority affecting
the Issuer or any of its assets regarding any claim in excess of
P
= 100,000,000.00; (ii) any labor controversy resulting or threatening
to result in any action against the Issuer that may materially and
adversely affect its operations or may result in a strike against it,
(iii) any Event of Default or any event, which, upon a lapse of time
or giving of notice or both, would become an Event of Default, (iv)
any damage or destruction or loss which might materially and
adversely affect its assets, business or financial conditions or (v)
any other matter or conditions affecting the Issuer or which might
have a material adverse effect on the business, assets, condition,
or operations of the Issuer, or which might materially and
adversely affect the Issuer’s ability to duly perform and observe
its obligations and duties under the Notes, immediately upon
becoming aware that the same is pending or has been
commenced or has occurred.
(k)
Additional Instruments.
The Issuer shall, when so requested in writing, provide any and all
information reasonably needed by the Public Trustee to enable it
to comply with its responsibilities and duties under the BSP Rules,
the Notes, and the Trust Agreement; provided, that, in the event
that the Issuer cannot, for any reason, provide the required
information, the Issuer shall so immediately advise the Public
Trustee.
(l)
Cease and Desist Order.
The Issuer shall promptly advise the Noteholders through the
Public Trustee: (i) of any request by any government agency for
any information related to the Notes, and (ii) of the issuance by
any governmental agency of any cease-and-desist order
suspending the distribution or sale of the Notes or the initiation
of any proceedings for any such purpose; provided, that no
amendments or supplements to any selling materials, offering
circulars, or other documents pertaining to the offer of the Notes
have been or will be made without the prior written notice to, and
without the approval of, the Public Trustee.
(m) Suspension Orders.
The Issuer shall obtain at its sole expense the withdrawal of any
order suspending the transactions with respect to the Notes at the
earliest time possible.
(n)
Maintenance of Records related to the Notes.
The Issuer shall ensure that any documents related to the Notes
will, at all times, comply in all material respects with the applicable
laws, rules, regulations, and circulars, and, if necessary, make the
appropriate revisions, supplements, and amendments to make
them comply with such laws, rules, regulations, and circulars.
32
(o)
Maintenance of Other Records.
The Issuer shall execute and deliver to the Noteholders through
the Public Trustee such reports, documents, and other information
respecting the business, properties, condition, or operations,
financial or otherwise, of the Issuer as the Public Trustee may
from time to time reasonably require.
(p)
Notice of Default.
The Issuer shall, as soon as possible and in any event within 5
days after the occurrence of any default on any of the obligations
of the Issuer, or other event which, with the giving of any notice
and/or with the lapse of time, would constitute a default under the
agreements of the Issuer with any party, serve a written notice to
the Noteholders through the Public Trustee of the occurrence of
any such default, specifying the details and the steps which the
Issuer is taking or proposes to take for the purpose of curing such
default, including the Issuer’s estimate of the length of time to
correct the same.
(q)
SEC/PSE Filings.
The Issuer shall make available to the Public Trustee financial and
other information regarding the Issuer by filing with the SEC and/or
PSE, at the time required or within any allowed extension, the
reports required by the SEC and/or PSE, as the case may be, from
listed companies in particular and from corporations in general.
(r)
Services of External Auditor.
The Issuer shall maintain the services of its current external
auditor and in any event where the current external auditor of the
Issuer shall cease to be the external auditor of the Issuer for any
reason, the Issuer shall appoint another reputable, responsible and
internationally accredited external auditor.
Negative Covenants
(a)
Encumbrances.
The Issuer shall not permit any indebtedness to be secured by or
to benefit from any Lien in favor of any creditor or class of
creditors with respect to any present or future property or the right
of the Issuer to receive income, nor will the Issuer permit any
creditor to receive any priority or preference arising under Article
2244(14) of the Civil Code of the Philippines over the claims of the
Noteholders hereunder, which claims shall at all times rank pari
passu in all respects with all other unsecured obligations of the
Issuer covered thereunder, provided however, that this restriction
shall not apply to:
(i)
any Lien the benefit of which is at the same time or prior to
its creation extended equally and ratably to the Noteholders
and all other sums due and to become due from the Issuer
under the Notes in a manner and in all respects (including in
particular, but without limitation, as to documentation)
acceptable to the Majority Noteholders;
33
(ii)
any Lien over any asset created or assumed at the time of
the purchase by the Issuer of such asset to secure payment
of the purchase price of such asset or to secure the payment
of any indebtedness in respect of borrowed money (including
extensions and renewals thereof and replacements therefore)
incurred for the purpose of financing the purchase of such
assets;
(iii) any Lien created for the purpose of paying current taxes,
assessments or other governmental charges which are not
delinquent or remain payable without any penalty, or the
validity of which is contested in good faith by appropriate
proceedings upon stay of execution of the enforcement
thereof;
(iv) any Lien to secure: (a) surety or appeal bonds; (b) bonds for
release of attachment, stay of execution or injunction; (c)
performance of bids, tenders, contracts (other than for the
repayment of borrowed money) or leases in the normal
course of the Issuer’s business;
(v)
Liens on the properties and assets of the Issuer (a) imposed
by law, such as carriers’, warehousemen’s and mechanic’s
liens and other similar liens arising in the ordinary course of
business and not material in amount; (b) arising out of
pledges or deposits under workmen’s compensation laws,
unemployment insurance, old age pensions or other social
security or retirement benefits or similar legislation;
(vi) any Lien existing on the date of this Agreement which is
disclosed in writing by the Issuer to the Public Trustee or in
the Offering Circular or the Issuer’s 2004 audited financial
statements; and,
(vii) any Lien which secure (x) letters of credit, bid bonds,
performance bonds or similar instruments procured by the
Issuer in the ordinary course of business, and/or (y) foreign
currency and interest rate swap and derivative transactions
undertaken by the Issuer in the ordinary course of business.
(b)
Unauthorized Business.
The Issuer shall not engage in any business except that
authorized by its Articles of Incorporation.
(c)
Material Change of Corporate Structure.
Except if the Issuer is the surviving entity and provided that such
event will have no material adverse effect on the financial
condition of the Issuer, the Issuer shall not effect any merger,
consolidation or other material change in its ownership, corporate
set-up or management or character of business.
(d)
Sale of Assets.
The Issuer shall not sell, transfer, convey, lend or otherwise
dispose of all or substantially all of its assets.
34
(e)
Loans/Advances.
The Issuer shall not extend any loan or advances to its directors
and officers, except loans or advances granted pursuant to
benefits, compensation, reimbursements, and allowances as may
be allowed under existing Issuer policies and practice and such
loans and advances as may be allowed under existing laws and
regulations.
(f)
Assignment.
Except by way of security as may be permitted above, the Issuer
shall not assign, transfer or otherwise convey any right to receive
any of its income or revenues except in the ordinary course of its
business.
(g)
Guaranty.
Except in the ordinary course of business, the Issuer shall not
purchase, repurchase or otherwise acquire, assume, guarantee,
endorse or otherwise become directly or contingently liable
(including, without limitation, being or becoming liable by way of
agreement, contingent or otherwise, to purchase, to use facilities,
to provide funds for payment, to supply funds to or otherwise
invest in the debtor or otherwise to assure the creditor against
loss) for or in connection with any obligation or indebtedness,
stock or dividends of any other person.
(h)
Dividends.
The Issuer shall not declare or pay any dividends (other than stock
dividends) during an Event of Default or if payment would result to
an Event of Default.
(i)
Treasury Shares/Decrease of Authorized Capital Stock.
The Issuer shall not acquire into treasury outstanding shares or
decrease or reduce its authorized capital stock during an Event of
Default or if such acquisition or decrease/reduction in the
authorized capital stock would result to an Event of Default.
(j)
Suspension of Business Operations.
The Issuer shall not voluntarily suspend all or substantially all of
its business operations.
(k)
Payment Set-Offs.
Except as otherwise allowed hereinabove, the Issuer shall not
grant, in any of its future loan or credit agreements, any creditor
any right above and beyond what is provided under Philippine laws
to apply amounts on deposit with or in possession of any such
creditor by way of set-off in reduction of any amount owing under
said loan or credit agreements.
35
(l)
Management Contracts and Other Arrangements.
The Issuer shall not enter into any management contracts, profitsharing or any similar contracts or arrangements whereby its
business or operations are managed by, or its income or profits
are, or might be shared with, another person, firm or company,
which management contracts, profit-sharing or any similar
contracts or arrangements will materially and adversely affect the
Issuer’s ability to perform its material obligations under the Notes.
(m) Amendment of Articles and By-laws.
The Issuer shall not amend its Articles of Incorporation or By-laws
if such amendments have the effect of changing the general
character of its business from that being carried on at the date
hereof.
(n)
Subordinated Debt.
As long as any obligations under the Notes remain outstanding,
the Issuer shall not create, issue, assume, guarantee, or otherwise
incur any bond, note, debenture, or similar security which shall be
or purport to be subordinated obligations of the Issuer, or which
shall be considered capital of the Issuer for any regulatory
purposes, unless such obligation ranks pari passu with, or junior
to, the Issuer’s obligations under the Notes in any proceedings in
respect of the Issuer for insolvency, winding up, liquidation,
receivership, or other similar proceedings (the Winding-Up
Proceedings). The Notes shall not be used as collateral for any
loan made by the Issuer or any of its subsidiaries, if any, or
affiliates.
These covenants of the Issuer shall survive the issuance of the
Notes and shall be performed fully and faithfully by the Issuer at
all times while the Notes or any portion thereof remain
outstanding.
Events of Default
The Issuer shall be considered in default under the Notes in case
any of the following events shall occur:
(a)
Payment Default.
The Issuer fails to pay any principal and/or interest due on the
Notes.
(b)
Representation/Warranty Default.
Any representation and warranty of the Issuer or any certificate or
opinion submitted by the Issuer in connection with the issuance of
the Notes is untrue, incorrect, or misleading in any material
respect.
(c)
Covenant Default.
The Issuer fails to perform or violates its covenants under the
Notes, and such failure or violation is not remediable or, if
remediable, continues to be unremedied for a period of 10 days
from notice by the Public Trustee to the Issuer, Provided that the
negative covenants specified above shall not be remediable.
36
(d)
Other Provisions Default.
The Issuer violates any term or condition of any contract executed
by the Issuer with any other bank, financial institution, or other
person, corporation, or entity for the payment of moneys which
constitutes an event of default under said contract; or, in general,
the Issuer violates any contract, law, or regulation which (i) if
remediable, is not remedied by the Issuer within 10 days from
notice by the Public Trustee to the Issuer, or is otherwise not
contested by the Issuer, (ii) results in the acceleration or
declaration of the whole financial obligation to be due and
payable prior to the stated normal date of maturity, or (iii) will, in
the reasonable opinion of the Public Trustee, adversely and
materially affect the performance by the Issuer of its obligations
under the Notes and pay any amount outstanding on the Notes,
Provided however that, the Events of Default specified in Items
(a), (e), (f) and (g) shall not be remediable.
(e)
License Default.
Any governmental consent, license, approval, authorization,
declaration, filing or registration which is granted or required in
connection with the Notes expires or is terminated, revoked or
modified and the result thereof is to make the Issuer unable to
discharge its obligations hereunder or thereunder.
(f)
Legal Default.
It becomes unlawful for the Issuer to perform any of its material
obligations under the Notes.
(g)
Expropriation Default.
The government or any competent authority takes any action to
suspend the whole or the substantial portion of the operations of
the Issuer, or condemns, seizes, nationalizes or expropriates (with
or without compensation) the Issuer or any material portion of its
properties or assets.
(h)
Insolvency Default.
The Issuer becomes insolvent or is unable to pay its debts when
due or commits or permits any act of bankruptcy, including (i) filing
of a petition in any bankruptcy, reorganization, winding-up,
suspension of payment, liquidation, or other analogous
proceeding; (ii) appointment of a trustee or receiver of all or a
substantial portion of its properties; (iii) making of an assignment
for the benefit of its creditors of all or substantially all of its
properties; (iv) admission in writing of its inability to pay its debts;
or (v) entry of any order or judgment of any court, tribunal, or
administrative agency or body confirming the insolvency of the
Issuer, or approving any reorganization, winding-up, liquidation, or
appointment of trustee or receiver of the Issuer or a substantial
portion of its property or assets.
37
(i)
Judgment Default.
Any final and executory judgment, decree, or arbitral award for the
sum of money, damages, fine, or penalty in excess of
P
= 100,000,000.00 or its equivalent in any other currency is
entered against the Issuer and the enforcement of which is not
stayed, and is not paid, discharged, or duly bonded within 30 days
after the date when payment of such judgment, decree, or award
is due under the applicable law or agreement.
(j)
Writ and Similar Process Default.
Any writ, warrant of attachment or execution, or similar process
shall be issued or levied against more than half of the Issuer’s
assets, singly or in the aggregate, and such writ, warrant, or
similar process shall not be released, vacated, or fully bonded
within 30 days after its issue or levy.
(k)
Closure Default.
The Issuer voluntarily suspends or ceases operations of a
substantial portion of its business for a continuous period of 30
days, except in the case of strikes or lockouts when necessary to
prevent business losses, or when due to fortuitous events or force
majeure, and, provided that, in any such event, there is no
material adverse effect on the business operations or financial
condition of the Issuer.
Effects of Default
Events
The Public Trustee shall, within 3 Banking Days after receiving
notice of the occurrence of any Event of Default, give to the
Noteholders notice of the occurrence of an Event of Default.
If any one or more of the Events of Default shall have occurred
and be continuing, after any applicable cure period shall have
lapsed, the Public Trustee may, upon the written direction of
persons holding at least 51.00% of the aggregate principal amount
of the issued Notes (the Majority Noteholders), require the Issuer
to perform any act as the Majority Noteholders may reasonably
require in order to cure the default as may be allowed under the
BSP Rules, without prejudice to any other remedies to which the
Noteholders may be entitled; provided, that in case of an
Insolvency Default, the Public Trustee shall on its own (i)
institute any Winding-Up Proceedings in accordance with
applicable laws or perform any act for the enforcement of any
obligation under, or collection of the principal and interest on, the
Notes on the understanding that the Notes shall be subordinated
in the right of payment of principal and interest to all depositors
and other creditors of the Issuer, except those creditors expressed
to rank equally with, or behind holders of the Notes, and/or (ii)
declare the principal of the Notes to be immediately due and
payable, without prejudice to the other remedies available to the
Noteholders, in accordance with the BSP Rules.
Meetings of
Noteholders
All meetings of the Noteholders shall be held in Makati City upon
prior notice.
38
Notice of Meeting of
Noteholders
Subject to the terms of the Trust Agreement, notice of every
meeting of the Noteholders, setting forth the time, place, and
purpose of such meeting in reasonable detail, shall be sent by the
Public Trustee to the Issuer and to each of the registered
Noteholders not less than 15 days nor more than 45 days prior
to the date fixed for the meeting and shall likewise be published in
at least 2 newspapers of general circulation in the Philippines (with
one newspaper being the Philippine Daily Inquirer) for 2
consecutive days at any time prior to the date stated in the
notice for the date of the meeting; provided, that all reasonable
costs and expenses incurred by the Public Trustee for the proper
dissemination of required information on the requested meeting
shall be reimbursed by the Issuer within 3 Banking Days from
receipt of the duly supported billing statement.
Taxation
Interest income on the Notes held by Eligible Holders shall be
subject to a final withholding tax of 20.00% or such rate as may be
provided by law or regulation, which shall be withheld at source.
Interest income received by non-resident individuals not engaged
in trade or business in the Philippines shall be subject to a final
withholding tax of 25.00%. Interest income received by nonresident foreign corporations shall be subject to a final
withholding tax of 35.00%. The tax shall be for the account of
the affected Noteholder, and shall be withheld at source. The
foregoing rates may be subject to further reduction by any
applicable tax treaty.
However, under the Tax Code, interest income from long-term
deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts
and other investments with a maturity period of not less than 5
years, the form of which shall be prescribed by the BSP and
issued by banks only (not by non-bank financial intermediaries and
finance companies) to individuals in denominations of
Php10,000.00 and other denominations as may be prescribed by
the BSP, is exempt from income tax. Provided that, should the
holder pre-terminate the deposit or investment before the 5th year,
a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds
of the long-term deposit or investment certificate based on the
remaining maturity thereof:
4 years to less than 5 years — 5.00%;
3 years to less than 4 years — 12.00%; and
Less than 3 years — 20.00%.
39
Thus, all payments of principal and interest in respect of individual
Noteholders who are (i) Philippine citizens; (ii) resident aliens; and
(iii) non-resident aliens engaged in trade or business within the
Philippines, shall be made free and clear of, and without
withholding or deduction for, any taxes, duties, assessments, or
governmental charges of whatever nature imposed, levies,
collected, withhold, or assessed by or within the Philippines or
any authority therein or thereof having the power to tax, unless
such withholding or deduction is required by law. In such event,
the Issuer shall pay such additional amount as will result in the
receipt by such Noteholders of such amounts as would have been
received by them had no such withholding or deduction been
required.
In accordance with Clause D(7)(e) of the BSP Rules, negotiations/
transfers from one Noteholder to another do not constitute pretermination.
Banking Day
Any day in a week, other than Saturday or Sunday or holidays,
when banks are not required or authorized to close in Makati City.
40
CAPITALIZATION OF THE BANK
The following table sets out the unaudited capitalization of the Bank and indebtedness of the
Bank (i) as of 30 September 2005, and (ii) as adjusted for the proposed issuance of the
Notes. This information has been extracted from the unaudited financial statements of the
Bank as at and for the nine months ended 30 September 2005. Such unaudited financial
statements are not necessarily indicative of the results of the operations of the Bank for the
full year. The following selected financial information should be read together with other
portions of this Offering Circular.
Table 4. Capitalization of the Bank
As of 30 September 2005
(Php millions)
As adjusted
(Php millions)
Short-term liabilities
Deposit liabilities
Bills payable and other liabilities
41,223
1,414
41,223
1,414
Total short-term liabilities
42,637
42,637
Long-term liabilities
Deposit liabilities
Bills payable and other liabilities
Subordinated Notes due 2016 (currently being issued)
5,584
0
5,584
0
2,000
Total long-term liabilities
5,584
7,584
Capital funds
Capital stock
Surplus
Surplus reserves
Net unrealized gains/loss on ASS and other investments
1,795
2,435
388
397
1,795
2,435
388
397
Total capital funds
5,015
5,015
53,236
55,236
Total capitalization and indebtedness
Source: PSBank
Notes:
(1)
Par value Php10 per share; authorized: 425,000,000 shares; as at 30 September 2005, 179,501,520 shares of
common stock were issued and outstanding.
(2)
Since 30 September 2005, there has been no material change in the capitalization of the Bank.
41
DESCRIPTION OF THE BANK
Introduction
Philippine Savings Bank (the ��Bank’’) is a thrift bank based in the Philippines. It offers a wide
range of banking and other financial products and services, including deposits, loans,
treasury, credit card, and trust. It caters mainly to the retail and consumer markets. The Bank
is ranked 2nd among the country’s 84 thrift banks in terms of assets as of 30 September 2005
based on data from the Bangko Sentral ng Pilipinas (��BSP’’). The Bank’s total assets were
Php45.79 billion and Php53.24 billion as at 31 December 2004 and 30 September 2005,
respectively, and total capital funds were Php4.25 billion and Php5.01 billion as at 31
December 2004 and 30 September 2005, respectively.
As of end-September, 2005, the Bank has a network of 150 branches nationwide. Of these, 93
branches are strategically located in Metro Manila and 57 are situated outside Metro Manila.
The Bank also has 127 ATMs, which are part of the Bancnet consortium.
The Bank is listed on the Philippine Stock Exchange (the ��PSE’’) with a market capitalization
of Php6.28 billion as of 29 December 2005 with approximately 6.00% of the Bank’s
outstanding shares held by the other minority shareholders and the public.
As of 30 September 2005, the Bank’s total capital adequacy ratio was 13.54%.
History
The Bank was established by the late Dr. Guillermo Picache on 30 June 1959 primarily to
engage in savings and mortgage banking. Its first head office was located in Quiapo, Manila.
In 1973, the Bank’s ownership changed from the Picache family to the Dolor family. In 1983,
Metrobank acquired majority share in the Bank, and in 2004 further increased its
shareholdings to the present level of 74.23%.
In 1991, the Bank was authorized to perform trust functions, and in 1995, was granted a
quasi-banking license. In 1994, its shares were listed on the PSE and made it the 1st publicly
listed thrift bank in the country. The 1st offering of 25.00% stock rights to the public raised
Php602.00 million, and the 2nd, done the following year, provided Php544.00 million,
accounting for the 63.00% growth in capital funds.
The Bank
de Roxas
the Bank
construed
moved its principal office to its current address at the PSBank Center, 777 Paseo
corner Sedeno St., Ayala Avenue, Makati City, Philippines in 2003. The website of
is www.psbank.com.ph. No information on the website should be considered or
as part of the Offering Circular.
Strategy of the Bank
Throughout its 45 years of operations, the Bank’s philosophy is that of being responsive to its
client’s needs. While its capitalization of Php5.00 billion qualifies it to become a commercial
bank, the Bank has decided to remain a thrift bank and use its resources to aggressively
compete in retail banking.
The Bank will continue to harness inherent synergies with Metrobank but will remain resolute
in differentiating itself in terms of markets and products. The Bank and Metrobank have
distinct core market focus and have agreed on a coherent strategy on market segmentation.
Operational synergies are achieved through coordination on branch expansion, sharing of
integrated data and ATM infrastructure, coordination on group-wide concentration limits, and
maximization of each institution’s competitive advantage such as the credit card business.
In 2002, the Bank assembled a new management team with fresh ideas and strong
experience in consumer marketing to champion the business platform of becoming the
country’s consumer and retail bank of choice. The new team has grown the Bank’s business,
42
guided by more than the traditional banking mindset of harnessing its members’ different
fields of expertise and adopting best consumer marketing practices that support the Bank’s
vision and objectives.
The years 2002 to 2004 were focused on 1) launching key pioneering products backed by
customer acquisition programs and expanded customer coverage, 2) designing new and more
powerful technology applications that reduced the Bank’s turnaround time, now considered to
be the fastest in the industry, in processing of loan applications 3) re-imaging of the Bank,
and 4) promoting a customer-centric performance oriented culture. The Bank’s strategy is
focused on Service Quality Management, to differentiate the ��PSBank Experience’’ of its
customers in an industry where homogenous products and services are on offer.
The Bank has been constantly at the forefront of developing new products to widen and
expand its customer reach. From 2002, the bank made it simpler than ever for its customers
to avail of auto loans via fast approval rates, low interest payments, flexible payment terms
and convenient modes of payment. Based on data from the Chamber of Automotive
Manufacturers of the Philippines Inc., an association of car manufacturers in the
Philippines, the Bank has been able to capture 10.40% share of industry sales estimated at
71,936 units as of end-September 2005. The thrift bank auto loans market is worth Php34.57
billion as of end-June 2005, according to BSP data. During this period, the Bank’s auto loans
were at Php8.15 billion, which translates to a market share of 23.58%.
Different mortgage and personal loan products have also been launched over the years, all
aimed at improving its share in an increasingly competitive market. More specifically, the
Bank’s mortgage loan portfolio was at Php6.13 billion in end-June 2005 or approximately
14.26% of the total residential loan market. Total mortgage loans of the thrift bank sector
reached Php42.96 billion in June 2005.
In 2003, 3 pioneering products were introduced in the market, namely, the Flexi Credit Line
(eventually re-launched as Money Card), which is the first and only multi-purpose, no
collateral loan accessible via ATM; the Home Credit Line, a revolving credit facility based on
the appraised value of a residential collateral; and the Business Credit Line, which provides
individual homeowners and small and medium entrepreneurs flexibility and convenience in
accessing their revolving credit facilities through personal checks. In 2004, the Bank launched
its own credit card, the PSBank Mastercard, and the 3-in-1 Premium Checking Account.
Technological applications were the engine powering the Bank’s growth over the past few
years. It has put in place continuous system and process improvement projects, which
enabled it to deliver faster turnaround time for loan approvals.
Today, the Bank offers a 6-hour turnaround time for Auto Loan applications, 3 days for
Personal Loans, and 5 days for Home Loans. The Bank invested in the Integrated Loans
System (ILS), Integrated Customer Database (ICDB), and the Intranet Loans Application
Processing System (iLAPS) to meet increased business volumes and to provide the entire
PSBank branch network with quick access to information critical to efficient customer service.
Other technology applications that were harnessed include Info Channel, an integrated source
of information on any bank-related policy and activity, Operation and Processing Integrated
Control System (OPICS) which automated the entire Treasury operations from deal entry to
accounting and reporting; Collection and Asset Management System (CAMS) which
automated all phases of collection, remedial account management, legal account
management, and asset recovery management; PDC.net, a web-based solution that enables
the automated management and control of postdated checks; Integrated Financial Accounting
System (IFAS), and the Signature Verification System (SVS). In September 2005, the Bank
became the 1st bank to fully deploy and launch a new Software Delivery Management System
(SDMS) that allows the Bank to update its ATM screens from a central location. SDMS
enables the Bank to promote its products, services, on-going promotions, properties for sale,
among others, on the ATMs, rather than just providing its clients the facility for dispensing
cash and bills payment.
43
The Head Office and Business Units of the Bank have moved to a more accessible area in
Makati and a new design for its corporate signage was developed. Both print and TV
advertisements were also undertaken to improve product and name recall. In 2005, the
following advertising campaigns were carried out: 1) ��Simple lang’’ for Auto Loan, 2) ��Itaga
mo sa bato’’ for Home Loan, 3) ��Tulad mo, maaasahan’’ for Money Card, and 4) ��Strictly
family matters’’ for PSBank Mastercard.
The Bank’s Service Quality Division, in tandem with the newly set up Customer Service
Department, focuses on complaints management. In 2006, a ��Complaints Infrastructure’’ will
be implemented to further standardize the process and facilitate complaints resolution.
Process standardization is on-going in all units of the Bank, including the measurement of
efficiency of delivery or turnaround time of each business unit.
The Bank also launched 4 major training programs in 2005, namely 1) ��It’s Showtime’’ for
selected branches and loan divisions to further improve customer servicing, 2) ��In-Branch
Selling Program’’ for all branch personnel to convert operations-oriented branches into strong
�sales’ teams, 3) ��Corporate Ethics’’ for all Bank employees to strengthen character and
integrity, and 4) ��Information Technology Security Awareness Workshop’’ for all staff to
maximize technology and automation of operations.
Strategic Initiatives
From a #4 industry ranking in 2001 in terms of assets, the Bank has grown to become the 2nd
biggest thrift bank in the Philippines today. Strategic initiatives have been undertaken to
solidify the Bank’s market leadership and sustain growth. However, these anticipated
developments are not assured and actual results may materially differ as a result of risks
and uncertainties the Bank faces.
Achieve Top Industry Standing. The Bank aims to achieve top industry standing in the
Thrift Bank sector by 2010 in terms of balance sheet and profitability. The Bank is focusing on
generating low cost deposits and maximizing relationship potential through product innovation
and cross-selling efforts. By 2010, the Bank aims to make at least 90.00% of its branches
profitable. It is also open to the acquisition of loan portfolios or institutions that are similarly
placed, provided these are aligned with the Bank’s stated vision and strategy.
Redefining Business Divisions. To meet the challenges in an intensely competitive market
and to manage the business more effectively, the Bank will continue its initiative of reviewing
and reorganizing business unit structures and reorienting management perspective to be more
customer-centric. Branch managers and business unit heads are expected not only to
profitably manage current business operations but also have an entrepreneurial mindset.
Performance is measured against pre-determined Key Result Areas (KRA) that help
management and staff focus their efforts on the Bank’s objectives. To equip front liners with
tools to meet growth objectives, the Bank continues to invest in product, sales, and customer
service training.
Sustained Network Expansion. The Bank is firm in its resolve to achieve dominance in the
consumer banking industry. Towards this end, it will pursue further network expansion to
improve market coverage nationwide through expanding its branch and ATM network and
developing eBanking. The Bank aims to have 200 branches in the next 5 years. The bias will
be towards key cities or municipalities in the countryside that have untapped sizable levels of
deposits and demand for consumer and SME loans. The Bank is also targeting the installation
of 180 ATMs by 2008, consistent with its intention of becoming closer to its market. eBanking
is another channel for remote, real-time loan and deposit inquiries and applications,
requisitions, account statements generation and payments. The project commenced in 2003
and consists of developing and implementing internet and mobile banking services. The
Bank’s internet service will be launched in phases over a 3-year period starting in the 2nd
quarter of 2006.
44
Optimize Marketing Efforts. Aggressive marketing efforts begin in-branch by providing staff
with adequate product and sales training and easy access to information on bank products,
policies, and other activities via the in-house Info Channel. In terms of infrastructure, the Bank
will maximize the use of its new Software Delivery Management System (SDMS), which allows
it to update its ATM screens from a central location. The screens will be used for marketing
messages and information dissemination to users of PSBank ATM. In the marketplace, the
Bank’s television, radio, and print advertisements will aim to reinforce the Bank’s image as
customer-focused in the consumers’ consciousness.
Support Initiatives
Internal Processes. In 2005, the Bank spearheaded the improvement and streamlining of
internal processes to complement business growth. Various surveys were launched to enable
the Bank to capture client perceptions and work on exceeding performance expectations.
Technology Applications. The Bank will launch Phase I of its Internet service in 2006, and
begin planning for its Mobile banking service before 2008. The Bank will also work at a
structure where customers can directly apply at the offices of its business partners namely,
dealers for Auto Loans, developers for Home Loans, and corporations for Personal and other
loans. Up to Php100.00 million in Information Technology (IT) investments are expected yearly
to complement powerful key core systems already in place to support its growth strategy.
Resource Requirements. Aside from investing in technology, the Bank will continue to
invest in the development of its people through continued training on the Bank’s sales culture,
new products, risk appreciation, customer service and other development programs. The Bank
also has appropriate incentive packages in place to encourage expansion of the marketing
channels of the Bank’s products.
Product Development, Communications and Marketing. The Bank utilizes various
consumer research studies to develop new or enhance existing products and marketing
programs. It will continue to maximize the use of customer surveys to measure customer
satisfaction drivers such as speed in processing, complaint handling, and problem resolution,
and, as a feedback mechanism, to improve customer service. The Bank utilizes external
communications to effectively build and reinforce its story among its markets. The Bank has
contracted the services of top advertising agencies to launch its advertising campaigns and
provide supplemental public relations efforts.
Organizational Structure
The Bank’s principal business activities are organized as follows: Consumer Banking,
Corporate Banking, and Treasury.
Organization Structure
45
The table below shows the contribution of each business segment for the period ending 30
September 2005.
Table 5. Segment Report
(In Php millions)
Net interest income and other income
Other expenses
Income before provision for probable
losses and income tax
Consumer
Banking
Corporate
Banking
1,672.24
1,381.67
631.34
462.47
264.69
26.91
2,568.27
1,871.06
290.56
168.87
237.78
697.22
Treasury
Total
Source: PSBank
Consumer Banking Group
The Consumer Banking Group principally handles individual customer deposits and provides
consumer-focused loans, and fund transfer facilities. Its loan products are comprised of loans
for mortgage, auto and personal purposes. Retail deposit products include current and
savings accounts (CASA) and time deposits in peso and US Dollar. Services offered include
bills payment, safekeeping of post-dated checks, among others. The group offers the PSBank
Credit Card, the back office operations of which is outsourced to the Bank’s sister company,
the Metrobank Card Corporation.
Commercial Banking Group
Commercial Banking Group principally handles loans and other credit facilities for small and
medium enterprises (SMEs), corporate and institutional customers. The banking products and
services offered by the group include SME business credit line secured by real estate
mortgage, term loans, short-term credit lines, floor stock financing lines, standby letters of
credit, domestic letters of credit, and deposit collateral loans.
Treasury Group
The Treasury Group provides money market, trading, and treasury services, as well as
manages the Bank’s funding operations by use of treasury bills, government securities and
placements with other banks. The group is composed of the Liquidity and Reserve
Management Department, Foreign Currency Deposit (FCDU) Department, Government
Securities Trading Department, and Treasury Marketing Department (TMD). Treasury
products and services available through the group include peso and USD trading
government securities, commercial papers sales and regular foreign exchange transactions.
Trust Division
The Bank has a Trust Division engaged in trust and fiduciary activities, which include living
trust and employee benefit trust. Its agency functions include investment management
agreements, escrow agency, and safekeeping and custodianship.
Description of Assets and Liabilities of the Bank
Loan Portfolio
As of 30 September 2005, the Bank’s total gross loan portfolio amounted to Php30.00 billion,
representing approximately 56.00% of total assets as of that date. As of 30 September 2005,
consumer loans represented approximately 67.00% of the Bank’s total outstanding loans, with
commercial lending amounting to approximately 31.00%, and the balance of 2.00%
representing loans to other sector.
46
Industry Concentration
Thrift banks are provided with more relaxed statutory limits by the BSP. While the BSP
requires commercial banks to limit exposure to the real estate industry to 30.00% of its loan
portfolio, this level represents a prudential, rather than mandatory, limit to thrift banks. As of
30 September 2005, the Bank has an aggregate risk exposure to the Real Estate sector of
21.23%. The bulk of the Bank’s exposure is in the Other Community, Social and Personal
Activities sector with 31.07% of its total loan portfolio, followed by Wholesale and Retail Trade
sector with 27.00%.
The following table sets out an analysis of the Group’s total loan portfolio by economic activity
(in accordance with the BSP criteria):
Table 6. Breakdown of Loans by Economic Activity
As of
30 September
(In Php billions, except
for Percentages)
2005
Other community, social,
and personal activities
Wholesale and retail trade
Real estate
Agriculture
Manufacturing, banks,
insurance and other
financial institutions
Mining and quarrying
Others
Total
%
As of 31 December
2004
%
2003
%
2002
%
8.685
7.548
5.934
2.032
31.07
27.00
21.23
7.27
10.94
3.001
5.390
1.590
44.63
12.24
21.99
6.49
8.077
5.316
5.096
1.200
39.76
26.17
25.08
5.91
5.118
2.255
5.958
1.089
30.74
13.54
35.78
6.54
1.570
0.016
2.166
5.62
0.06
7.75
2.025
0.016
1.55
8.26
0.07
6.32
0.105
0.001
0.520
0.52
0.00
2.56
1.005
0.015
1.211
6.04
0.09
7.27
27.951
100.00
24.512
100.00
20.315
100.00
16.651
100.00
Source: PSBank
Note: Loans to Other Community, Social, and Personal Activities sector include exposures to private households with
employed persons. Breakdown of Loans is net of unearned discount.
The Bank monitors its exposure to specific sectors of the economy such as agriculture and
small and medium-sized enterprises. BSP regulations currently require all Philippine banks to
set aside 25.00% of their loanable funds to the agricultural sector or invest in eligible
securities as an alternative form of compliance. As with most banks in the Philippines, the
Bank is in compliance with this requirement through its investments in government securities.
Likewise, banks are also required to set aside at least 6.00% for small enterprises and 2.00%
for medium-sized enterprises (altogether, the ��SMEs’’), of their total loan portfolios. As of
September 2005, its loans to small enterprises comprised 30.00% of its loan portfolio while
7.00% was allocated to medium-sized enterprises.
Loan Maturity Profile
The following table sets out an analysis of the Bank’s total loan portfolio by maturity:
Table 7. Breakdown of Loans by Maturity
As of 30 September
(In Php billions, except
for percentages)
Due within one year
Due within one to five
years
Due after five years
Total
2005
%
As of 31 December
2004
%
2003
%
13.431
48.05
6.433
26.24
5.610
27.62
10.665
3.855
27.951
38.16
13.79
100.00
12.025
6.054
24.512
49.06
24.70
100.00
8.955
5.750
20.315
44.08
28.30
100.00
Note: Breakdown of Loans is net of unearned discount.
Source: PSBank
47
As of 30 September 2005, the bulk of the Bank’s loan portfolio totaling 86.21% had maturities
within 5 years largely accounted for by its core product, which is consumer loans including
mortgage and auto loans. The growth in the loan portfolio was a result of intensive marketing
efforts complementing new product introductions and technology applications speeding up
loan application processing. The medium term profile of the loan portfolio is 50.00% matched
by Term Deposits with the balance funded with shorter-dated maturing deposits.
Interest Rates
As of 30 September 2005, 54.00% of the Bank’s total loan portfolio was on a fixed rate basis
while the remaining 46.00% is regularly repriced. The Bank sets interest rates based on the
Philippine Treasury Bill rate plus a spread that takes into account its view of the credit risk,
interest rates, product types, and tenors. The fixed rate loans are priced based on the
prevailing cost of the Bank for its term deposits. Floating rate loans are repriced for interest
periods of typically 30 to 90 days with a margin of between 5.00% and 6.00% per annum.
Size and Concentration of Loan
The Bank monitors its financial exposure to its customers in order to ensure that
concentration risk is prudently managed. As of 30 September 2005, the Group’s single
largest corporate borrower accounted for 3.00% of the Bank’s total outstanding loan portfolio.
As of 30 September 2005, the Bank’s 10 largest borrowers in the aggregate accounted for
Php4.08 billion, or 14.00% of its outstanding loan portfolio. All of these are performing.
Moreover, 50.00% of these loans will mature in 1 year while the remaining 50.00% will mature
between 3 and 10 years.
The BSP has set a prudential limit for thrift bank to maintain a financial exposure to any single
person or group of connected persons at a maximum of 25.00% of the Bank’s unimpaired
capital and surplus, which includes combined capital accounts, paid-in-capital and surplus, but
excludes reserves for valuation purposes, liabilities and deferred income tax. As of 30
September 2005, the Bank is in compliance with this single borrower’s limit with all of its
loans.
The following table sets out a breakdown of the Bank’s total loan portfolio by principal amount
as of 30 September 2005 :
Table 8. Breakdown of Loans by Principal
As of 30 September
(In Php billions, except for percentages)
2005
%
Less than 1.000 million
1.001 to 2.000 million
2.001 to 3.000 million
More than 3.000 million
12.85
4.34
1.48
9.28
45.98
15.53
5.29
33.20
Total
27.95
100.00
Source: PSBank
Note: Breakdown of Loans is net of unearned discount.
About 61.00% of the Bank’s loans are in the Php2.00 million and below bucket given its focus
on consumer loans. This provides a wide diversity of credit risk and avoids over-concentration
on a few borrowers.
48
The following table sets out an analysis of the Bank’s total loan portfolio by product:
Table 9. Breakdown of Loans by Product
As of 30 September
(In Php billions, except
for percentages)
Commercial (corporates
and SMEs)
Auto
Mortgage
Personal
Others
Total
2005
%
As of 31 December
2004
%
2003
%
9.30
8.95
6.81
2.23
0.65
33.28
32.03
24.37
7.98
2.34
8.83
7.30
5.77
1.89
0.73
36.02
29.77
23.53
7.70
2.98
8.61
5.59
4.53
0.91
0.67
42.38
27.54
22.29
4.46
3.32
27.95
100.00
24.51
100.00
20.31
100.00
Source: PSBank
Note: Breakdown of Loans is net of unearned discount.
As of 30 September 2005, 64.00% of the Bank’s total loan portfolio was in consumer loans, of
which 56.00% were in auto and mortgage loans. Over the past years, the Bank has
deliberately pursued a strategy of de-emphasizing on commercial loans, with a shift in focus
on mortgage, auto, and SME loans.
The following table provides an overview of the Bank’s loan portfolio by type of borrower:
Table 10. Breakdown of Loans by Type of Borrower
As of 30 September
(In Php billions, except
for percentages)
2005
%
As of 31 December
2004
%
2003
%
Government
Private Residents
.01
27.94
0.03
99.97
24.51
0.00
100.00
20.32
0.00
100.00
Total
27.95
100.00
24.51
100.00
20.32
100.00
Source: PSBank
Note: Breakdown of Loans is net of unearned discount.
Security
While the BSP does not impose a regulatory limit on any Bank’s unsecured aggregate risk
exposure, the Bank has an existing policy to limit its aggregate exposure for total unsecured
loans to an amount less than its single borrowers limit (SBL) or 25.00% of its unimpaired
capital and surplus. For DOSRI loans, the bank has an unsecured limit equivalent to 30.00%
of the total exposure. The Bank is in compliance with this DOSRI limit.
49
The following table sets out a breakdown of the Bank’s total loan portfolio by security as of 30
September 2005.
Table 11. Breakdown of Loans by Security
As of
30 September
As of 31 December
(In Php billions, except
for percentages)
2005
%
2004
%
2003
%
2002
%
Secured
Real estate
Deposit hold-out
Chattel
Securities
Others
Unsecured
21.060
11.079
0.354
8.713
0.695
0.219
6.891
75.35
39.64
1.27
31.17
2.49
0.78
24.65
18.379
10.025
0.444
7.029
0.00
0.881
6.133
74.98
40.90
1.81
28.68
0.00
3.59
25.02
16.008
9.098
0.379
5.413
0.951
0.167
4.307
78.80
44.78
1.87
26.65
4.68
0.82
21.20
13.265
8.120
0.306
3.168
1.592
0.079
3.385
79.67
48.77
1.84
19.03
9.56
0.47
20.33
Total
27.951
100.00
24.512
100.00
20.315
100.00
16.65
100.00
Source: PSBank
Note: Breakdown of Loans is net of unearned discount.
Credit Management Policies and Procedures
Approval Limits and Authorities
To properly manage credit risk, select credit officers and committees are assigned authorities
to approve credit applications based on their credit expertise and prudence in judgment. The
credit limit delegated to credit officers and committees takes into consideration the Bank’s
internal credit policies, market competition and regulatory requirements.
For consumer loans, all credit proposals undergo a preliminary credit scoring system in
iLAPS. The system has a built-in credit-scoring engine that automates the evaluation and
approval process based on a pre-defined credit-scoring model.
For consumer loans, the entire application process is automated from application up to
booking. Loan applications are encoded in HO and branches nationwide and are prescreened
using pre-defined credit acceptance parameters. During this process, names are matched
against the Bank’s Integrated Customer Data Base (ICDB) and credit checking is done to
validate and evaluate information. The system then decides through a built-in credit-scoring
engine that employs a behavioral scoring model. Deviations are routed to credit committee
members for approval. All approved loan applications are processed for booking by the Loans
Operation Group using the iLAPS Documentation Module that interface with ILS for creation of
loan account.
For commercial loans, the Commercial Banking Group prepares Offering Slips and initially
evaluates all credit proposals based on quantitative and qualitative factors. The evaluation is
backed up by financial spreads/ratios, bank statement analysis and credit investigation
conducted by the Credit Administration Group. These proposals undergo screening and
approval processes by the Credit Committee, Executive Committee or Board of Directors in
accordance with the approved credit delegations.
The internally developed ICDB system facilitates the processing of both consumer and
commercial loans. This file contains a consolidated customer database gathered from internal
and external sources developed to support the iLAPS and other processing systems of the
Bank.
Committees
Board of Directors. The Board of Directors (��BoD’’) is the Bank’s highest credit approving
authority. The BoD is responsible for establishing the Bank’s overall credit risk capacity and
delegating authority to Credit Committees in the approval of credit extensions within specified
limits. The BoD has authority to approve all types and amounts of credits, up to the Single
50
Borrower’s Limit set by regulatory bodies. It also has sole responsibility over loan approvals to
any director, officer, stockholder, and other related interest of the Bank (��DOSRI loans’’) and
Restructured Loans. The BoD has delegated limited credit-approving authority to the
Executive Committee and the Credit Committee, with the exception of DOSRI and
Restructured Loans. Credit items requiring BoD approval must first be presented to the
Credit Committee and the Executive Committee for approval and endorsement to the BoD.
Executive Committee. The Executive Committee (Excom) reviews and approves substantial
loan proposals, recommends additional conditions, requirements and changes in loan
applications. It consists of at least 5 members: the Bank’s BoD Chairman, Vice Chairman,
and members of senior management including the President and Executive Vice President.
Credit Committee. Credit approval is obtained from the collective approval of Credit
Committee (Crecom) members. A Crecom, with at least 2 members, is required to approve the
Bank’s consumer loans while 3 members are required to approve Commercial and Other
Loans. For the latter type of loans, one committee member should have required approving
authority. Single signatures are also in place for specific transactions as defined in the credit
delegations approved by the BoD. The Crecom is also responsible for recommending DOSRI
and restructured loans to the Excom and BoD.
Table 12. Loan Approval Limits
(In Php millions)
Board of Directors
Executive Committee
President
Executive Vice President
Branch Banking Group Head
Credit Administration Group Head
Commercial Credit Evaluation Head
Deposit Secured
over Php20 million
up to Php20 million
Php20 million
Php10 million
Php10 million
Php5 million
Real Estate Secured
over Php25 million
up to Php25 million
up to Php15 million
Php10 million
Php3 million
Php3 million
Php2 million
Source: PSBank
Asset and Liabilities Committee. The Asset and Liabilities Committee (ALCO) is composed
of 12 senior officers with 2/3 being considered a quorum. ALCO oversees the structure of the
Bank’s entire Balance Sheet. It is responsible for monitoring and assessing the current
business environment. Based on present and projected scenarios, the ALCO decides on the
appropriate short- and long-term strategies for the Bank. These scenarios determine pricing
matrices for deposit and loan products. Its members include the President and all senior
officers
Risk Management Committee. The Risk Management Committee (RMC) consists of 3
members of the BoD with a 7-member sub-committee comprising of the President, Audit
Head, Compliance Head, Operations Head, Credit Head, Treasury Head, and Risk
Management Head. It is responsible for the development and oversight of the Bank’s risk
management process. Core responsibilities of the RMC include identification and evaluation of
risk exposures, developing risk management strategies, implementing a risk management
plan, and reviewing and revising these plans as needed.
Audit Committee. The Audit Committee is composed of 3 Board members and the Internal
Audit Head. The committee is responsible for emphasizing the importance of maintaining a
sound system of internal control and the BoD’s oversight responsibility. The committee
provides oversight of the Bank’s internal and external auditors, reviews their reports and
reports of regulatory agencies, and ensures that management is taking appropriate corrective
actions in a timely manner. All regular and special audits are reported to the Audit Committee
and to the BoD during its monthly meetings.
Trust Committee. The Trust Committee supervises the proper exercise of the Bank’s
fiduciary powers with respect to the establishment of overall principles and policies, including
those for general administration, investment policies, new business derivation and major
51
assignments of functional responsibility. It is responsible for direction and review of affairs and
actions of all officers and employees designated by the Committee in exercise of its fiduciary
powers. The Committee meets at least quarterly or as the need arises. The Trust Committee
is composed of the President, Trust Officer and 3 Directors appointed by the BoD.
Corporate Governance Committee. The Corporate Governance Committee (CGC) ensures
the BoD’s effectiveness and due performance of corporate governance principles and
guidelines. It supervises the periodic performance evaluation of the BoD, its committees
and executive management. The CGC shall decide the manner by which the BoD’s
performance may be evaluated and propose, for the BoD’s approval, an objective
performance criteria to address how it has enhanced long-term shareholder value.
Loan Administration and Loss Provisioning
The Bank adheres to the general BSP guidelines in administering and classifying loans.
Accordingly, the Bank’s loan portfolio is grouped based on risk profile into Classified and
Unclassified accounts. Classified accounts are loans considered to have a higher risk than
normal. Classified accounts are further subdivided into:
Loans Especially Mentioned. These are loans and advances that are superior in quality to
those classified as substandard but have potential weaknesses which if uncorrected may
expose the Bank to greater credit risks, and thus, require closer management supervision.
Substandard Loans. These are loans and advances or portions thereof which appear to
involve a substantial and unreasonable degree of risk to the Bank because of unfavorable
record or unsatisfactory characteristics. There is a possibility of future loss to the Bank unless
given close supervision. Those classified as ��Substandard’’ must have a well-defined
weakness or weaknesses that jeopardize their liquidation. Such weaknesses may include
adverse trends or development of financial, managerial, economic or political nature, or a
significant weakness in collateral. No loans/advances are classified ��Substandard’’ if
repayments/collections seem reasonably assured.
Doubtful Loans. These are loans and advances or portions thereof which have the
weaknesses inherent in those classified as ��Substandard’’, with the added characteristics
that existing facts, conditions, and values make collection or liquidation in full highly
improbable and in which substantial loss is probable.
Loss Loans. These are loans and advances or portions thereof which are considered
uncollectible or worthless and of such little value that their continuance as bankable assets is
not warranted although the loans may have some recovery or salvage value. The amount of
loss is difficult to measure and it is not practical or desirable to defer writing off this basically
worthless asset even though partial recovery may be obtained in the future.
In accordance with BSP guidelines, the Bank appropriates specific loan loss allowance as
follows:
Table 13. Loan Loss Allowances
Credit Classification
% Reserves
Loans Especially Mentioned
Substandard
— Secured
— Unsecured
Doubtful
Loss
5
10
25
50
100
Source: PSBank
The Bank is in compliance with these loan loss allowances.
52
The table below is a summary of the risk classification of the aggregate loan portfolio (as a
percentage of total outstanding loans) and allowance for probable loan losses of the Bank:
Table 14. Loan Portfolio Risk Classifications
As of 30 September
(In Php billions)
2005
%
As of 31 December
2004
%
2003
%
Risk classifications:
Especially mentioned
Substandard
— Unsecured
— Secured
Doubtful
Loss
Total Classified
Unclassified
0.17
0.60
0.22
0.91
0.41
2.02
0.31
1.09
0.02
0.77
2.36
25.59
1.10
3.92
0.08
2.77
8.46
91.54
0.36
1.32
0.02
0.45
2.38
22.13
1.47
5.39
0.09
1.84
9.71
90.29
0.30
0.53
0.22
0.23
1.69
18.63
1.46
2.59
1.09
1.14
8.30
91.70
Total
27.95
100.00
24.51
100.00
20.31
100.00
Allowance for probable
loans losses:
Specific
General
0.88
0.27
76.89
23.11
0.64
0.22
74.01
25.99
0.49
0.17
73.80
26.20
Total
1.15
100.00
0.86
100.00
0.66
100.00
Source: PSBank
Note: Breakdown of Loans is net of unearned discount.
Real estate collaterals are appraised bi-annually.
The following table sets forth details of the Bank’s non-performing loans, ROPOA, nonperforming assets (as described below), restructured loans, and write-offs for loan losses for
the specified periods:
Table 15. Non-Performing Assets and Corresponding Allowances
As of 30
September
(In Php millions)
2005
(1)
Non-performing loans
Total loans (net of unearned discounts)
NPL as a percentage of total loans (%)
ROPOA — gross
Non-performing assets
NPA as a percentage of total resources —
ADB (%)
NPA as a percentage of total loans and
ROPOA (%)
Allowance for probable loan losses
Allowance for probable losses (ROPOA)
Allowance for probable loan losses as a
percentage of total non-performing loans
(%)
Allowance for probable losses as a
percentage of total non-performing assets
(%)
Total restructured loans
53
As of 31 December
2004
2003
2002
1,754
27,951
6.28
1,890
3,644
1,496
24,511
6.10
1,815
3,311
1,147
20,314
5.65
1,862
3,009
1,294
16,650
7.77
1,637
2,931
7.14
8.34
9.82
12.00
12.21
1,150
114
12.58
862
81
13.57
663
194
16.03
839
34
65.58
57.64
57.84
64.83
34.70
772.10
28.48
1,021.60
28.49
1,235.80
29.80
1,323.40
(1)
Based on the old BSP definition. The BSP issued Circular No. 351 in September 2002 allowing banks that have
no unbooked valuation reserves to exclude from non-performing classification loans classified as ��loss’’ in the
latest examination of BSP which are fully covered by allowance for probable loan losses, provided that interest
on said loans shall not be accrued. As of 30 September 2005, NPLs fully covered by allowance for probable
losses amounted to Php325.60 million.
Source: PSBank
Loans are classified as past due if (i) any repayment of principal at maturity or any scheduled
payment of principal or interest due quarterly (or longer) is not made when due or when the
total amount of arrearages reaches 20.00% of the total outstanding balance of the loan
regardless of the number of installments in arrears, and (ii) in the case of any principal and
interest due monthly, if the amount due is not paid and has remained outstanding for three
months or when the total amount of arrearages reaches 20.00% of the total outstanding
balance of the loan regardless of the number of installments in arrear. In the case of (i), loans
are considered non-performing if the payment is not made within 90 days. In the case of (ii),
such loans are considered non-performing upon the occurrence of the default in payment.
Loans, which have been foreclosed or transferred to the ROPOA account, are no longer
classified as ��non-performing’’ loans. Accrued interest arising from the loan accounts are
classified according to the classification of their corresponding loan accounts except for those
which remain uncollected after 6 months from the date such loans or installments have
matured of have become past due for which a 100.00% allowance is set up for uncollected
accrued interest receivables.
Loans are restructured on a case-to-case basis. In accordance with BSP guidelines, NPLs,
which are successfully restructured, are considered current and no longer non-performing, in
general, following a seasoning period of 6 consecutive payments on the restructured loan.
Restructured accounts are considered NPL again if payment is not made a day after the due
date. As of 30 September 2005, the Bank had a portfolio of Php772.00 million of restructured
loans, of which Php418.00 million are considered performing while the remaining Php354.00
million were non-performing.
The following table sets out the Group’s reconciliation of its non-performing loans over the
periods indicated:
Table 16. Movements in NPLs
As of 30 September
(Php millions, except percentages)
2005
Balance at beginning of period
Additions
Deductions: (Recovery/Cash Foreclosure)
Paid/Reversed to current status
Balance at end of period
Source: PSBank
54
%
As of 31 December
2004
%
1,496
878
(620)
85.29
50.06
(35.35)
1,147
849
(500)
76.67
56.75
(33.42)
1,754
100.00
1,496
100.00
The following table sets out the Bank’s reconciliation of its balance of reserves for loan losses
over the periods indicated:
Table 17. Reserves for Loan Losses
As of 30 September
(Php millions, except
percentages)
Balance at beginning of
period
Additions charged to
expense
Charge-off
Reversal and others
Balance at end of period
2005
%
As of 31 December
2004
%
2003
%
862.28
74.95
663.42
76.94
839.02
126.47
288.20
0
0
1,150.48
25.05
—
—
100
198.86
0
0
862.28
23.06
—
—
100
0
0
(175.60)
663.42
—
—
(26.47)
100
Source: PSBank
Sectoral analysis of non-performing loans
The following table sets out the Bank’s gross non-performing loans by the respective
borrowers’ industry or economic activity and as percentage of the Bank’s gross NPLs:
Table 18. Breakdown of NPLs by Sector
As of 30 September
(In Php millions, except percentages)
2005
Manufacturing
Wholesale and retail trade
Financing, insurance and other business services
Real estate
Other community, social, and personal activities
Mining and quarrying
Agriculture
Others (1)
Total
%
19.42
86.25
6.09
110.22
778.19
0.03
13.19
740.91
1.11
4.92
0.35
6.28
44.36
0.00
0.75
42.23
1,754.30
100.00
Source: PSBank
(1)
Others include employee loans, deposit-collateralized loans, post-dated checks rediscounting.
As of 30 September 2005, the Bank had no DOSRI loans that are non-performing.
Top 10 NPLs
As of 30 September 2005, the Bank’s top 10 NPLs amounted to Php408.52 million
representing 23.29% of total NPLs. The next 10 accounted for only Php82.57 million or
4.71% of total. As of 30 September 2005, the Bank’s largest NPL amounts to Php157.68
million or 8.99% of total NPLs.
Remedial Management
The Bank has a Remedial Management Group (��RMG’’) that manages and administers
problem loan accounts and ROPOA. RMG seeks to maximize the recovery of loans through
continued payments, rehabilitation of problem accounts or through alternative means of
payment.
55
The RMG manages the entire remedial cycle from normal collection, account management,
loans litigation, foreclosures and ROPOA management. It is supported by a system that
automatically triggers classification of these accounts based on pre-set criteria. The Bank has
also been conducting a monthly review of the iLAPS and has revised its credit model to make
credit parameters more in line with its current market experiences. Technology, which enables
RMG to generate the delinquency profile of the Bank, is being harnessed to speed up
collection. Processes are being improved to integrate asset recovery efforts under one
functional group which is RMG.
An internal legal counsel provides RMG with any legal assistance that may be required for
ROPOA management.
Foreclosure and Disposal of Assets
The following table sets out the movement in the Bank’s ROPOA (gross of allowance):
Table 19. Movements in ROPOA
As of 30 September
(Php millions, except
percentages)
2005
%
As of 31 December
2004
%
2003
%
Balance at beginning of
period
Additions
Sold/Disposed
1,734
461
(419)
97.64
25.96
(23.59)
1,668
420
(354)
96.19
24.22
(20.42)
1,602
322
(256)
96.04
19.30
(15.35)
Balance at end of period
1,776
100.00
1,734
100.00
1,668
100.00
Source: PSBank
The Bank had a net ROPOA of Php1.73 billion and Php1.78 billion as of 31 December 2004
and 30 September 2005, respectively, consisting of various real estate properties and
automobiles.
The Bank has a centralized collection infrastructure under its Remedial Management Group
(RMG) that manages all loans on a bankwide basis. This has resulted in improved
delinquency and NPL levels, consistent and quality implementation of collection processes,
higher cost efficiency as branches and other business units were unloaded of their collection
functions, and stronger controls and productivity monitoring.
The Bank’s end-to-end remedial management system integrates all units and processes
involved in the remedial cycle. These units include Collections, Special Accounts
Management, Loans Litigation and Asset Recovery. RMG implements an intensive portfolio
management process using the bucket collection approach, accelerated legal and foreclosure
processes, outsourced collection for skips and hardcore accounts under a ��no cure, no pay’’
scheme, short messaging system (SMS) for collection purposes, and quota and rewards
system for collection productivity.
The group is also in the process of building a robust collection and asset management system
(CAMS) to further improve productivity and efficiency using advanced features such as
automated cycle flows and workflow grids, parametric work loadings, SMS interactive
connectivity, and online productivity monitoring.
Securities Portfolio
There are 3 types of investment securities — Available For Sale (AFS), Trading Account
Securities (TAS) and Hold to Maturity (HTM). Securities are classified as AFS when
purchased and held indefinitely, but which the Bank anticipates to sell in response to
liquidity requirements or in anticipation of changes in interest rates or other factors. TAS
consists of government and private debt securities purchased and held principally with the
56
intention of selling them in the near term. HTM are debt securities where the Bank has the
positive intent and ability to hold to maturity. The Bank’s investment securities are comprised
mostly of AFS. As of 30 September 2005, the Bank’s AFS amounted to Php12.77 billion, or
75.03% of the Bank’s total investment securities.
The table below compares the book value of the investment securities to their market value as
of 30 September 2005.
Table 20. Breakdown of Securities Portfolio as of September 30, 2005
(In thousands)
Book Value
TAS (Php)
AFS (Php)
HTM (Php)
127,395
12,770,136
4,122,808
Market
Value
127,302
13,164,870
4,366,177
Source: PSBank
Both TAS and AFS are carried in the Bank’s books at fair market value. While HTMs are
carried at amortized cost, the Bank does a mark-to-market review of its portfolio monthly. As
of 30 September 2005, there was no impairment in the value of the Bank’s investment
securities.
The Bank’s AFS and HTMs are primarily invested in low risk and largely liquid assets in Peso
and US Dollar ROP bonds. As of 30 September 2005, Php2.97 billion of AFS and
Php2.17 billion of HTM were invested in Peso sovereign bonds and USD175.13 million and
USD34.82 million, respectively in US Dollar sovereign bonds.
Funding and Liquidity
Overview
Savings, demand, and time deposits primarily provide the Bank’s funding. Of the total amount
of deposits of Php46.81 billion as of 30 September 2005, these amounted to 21.84%, 11.68%
and 66.48%, respectively. The Bank also sources part of its funding requirements from the
interbank market from time to time, particularly in periods of high liquidity that generally
results in lower overall funding cost.
57
Sources of Funding
Deposit liabilities are the primary source of funding for the growth in the Bank’s assets.
Growth in deposits has been attributed to intensified efforts to bring in new depositors,
products and branches in recent years. There is no concentration or reliance on deposits of a
single entity or individual. Around 90.00% of total deposit liabilities have outstanding balances
of less than Php50.00 million, which represent stable deposits. The Bank also sources funds
in the interbank market. The following table sets forth the principal sources of funding and the
average cost of each funding source:
Table 21. Funding Sources
(In Php ’000)
For the nine
months ended
Sep 2005
Average
Cost (%)
For the
year ended
Dec 2004
Average
Cost (%)
For the
year ended
Dec 2003
Average
Cost (%)
Deposits
By Type
Demand
Savings
Time
30 to 90
91 to 180
Over 180
Total
5,468,626
10,221,021
31,117,574
15,634,634
7,168,726
8,314,214
46,807,221
3.41
4.00
5.35
2,071,542
24,247,860
13,926,182
6,015,315
2,899,623
5,011,244
40,245,585
2.08
5.55
4.62
715,858
20,716,617
6,340,215
2,696,949
832,689
2,810,577
27,772,689
0.06
4.87
4.76
By Currency
Peso
Foreign
Total
34,445,611
12,361,610
46,807,221
5.36
3.02
4.75
29,941,297
10,304,288
40,245,585
5.83
2.99
5.14
23,368,445
4,404,244
27,772,689
5.12
2.33
4.72
Source: PSBank
The Bank has successfully grown its deposits by 45.00% to Php40.24 billion as of 31
December 2004 and by 16.00% to Php46.81 billion as of 30 September 2005. While the cost
of deposits have largely been driven by interest rate movements, the Bank’s average cost of
deposits remains relatively low as it is driven by the continued rise in the share of checking
and savings accounts (��CASA’’) to total deposits. The Bank will continue to focus in growing
its CASA through launching new deposit products. The maturities of the Bank’s funding
portfolio allow funding stability and liquidity and achieve the targeted loan and deposit
maturities profile. The Bank’s deposits are typically rolled over on maturity, effectively
providing the Bank with a stable base of liquidity.
Liquidity — Regulatory Requirements
Currently, peso deposits and deposit substitutes are subject to 6.00% statutory and 2.00%
liquidity reserve requirements. At least 25.00% of the statutory reserve requirement must be
deposited with the BSP, which earns 4.00% interest per annum. The balance of 75.00% may
be in one or a combination of deposits with the BSP, cash at hand and/or in vault of the Bank.
All of the liquidity reserve may be held in the form of BSP-eligible Government securities.
In connection with foreign currencies, the BSP requires banks to maintain an asset cover of
100.00% for foreign currency liabilities, of which 30.00% must be in liquid assets.
Risk Management
The Bank is committed to applying the best market practices for risk management by adopting
the recommendations and guidelines of the relevant regulators and advisory bodies.
The Bank believes the ability to develop and maintain sufficient risk management skills in
monitoring, interpreting, and forecasting its risk profile will be an important factor in its future
success and building shareholder value. This focus has several components including
58
comprehensive risk management processes, accurate risk measures, investments in people
and technology to interpret and manage risk, stress testing and comprehensive process
reviews in connection with internal auditors and regulatory officials.
The Bank’s risk management structure is a top-down organization that commences with the
Board of Directors (BoD). The Bank’s Executive Committee (Excom) is in charge of reviewing
and approving substantial loan proposals up to its credit limit per approved delegation,
recommending additional conditions and requirements on applications for approval of the BoD.
Senior management is actively involved in planning, approving, reviewing, and assessing all
risks involved through the following committees: Credit Committee for credit risks; Asset and
Liabilities Committee (ALCO) for structural interest rate and liquidity risks; Risk Management
Committee (RMC) for overall risk management, including trading market risk; Audit Committee
for operations risks.
These committees serve as a mechanism for taking a panoramic view across products and
counterparties on and off the balance sheet of risks in the Bank’s day-to-day business
activities.
The Bank’s risk management organization is comprised of the Board of Directors (BOD),
Committees for Risk Management, Credit, Assets and Liabilities and Audit, the Risk
Management Unit, Internal Audit and Compliance Unit.
Committee
Membership
Primary Duties
Frequency
of Meetings
Board of Directors
Full Board, President/
CEO
Monthly
Overall credit policies;
Approval of all DOSRI
and restructured loans
regardless of amount;
Approval of Board
strategies and policies;
Approval of risk
management strategies
and policies; Approval of
loan proposals up to its
credit limit which is the
Bank’s Single Borrowers’
Limit
Executive Committee
Chairman, Vice
Chairman, President,
Executive VP, AVP,
Secretary
Bi-monthly
Reviewing substantial
loan proposals up to its
or as
credit limit and all loans needed
for endorsement and
approval by the Board of
Directors
Credit Committee
President, Executive VP,
Credit Administration
Head, Remedial
Management Head,
SFVP Area Head
Reviewing loan proposals Weekly
and recommending
additional conditions,
requirements, changes
on loan applications up
to its credit limit and all
loans for approval by the
Excom and Board of
Directors
59
Committee
Frequency
of Meetings
Membership
Primary Duties
Asset and Liabilities
Committee
President, Executive VP,
Chief Operating Officer,
Chief Finance Officer,
Treasury Head, Branch
Banking Head,
Commercial Banking
Head,
Marketing and
Communications Head,
Mortgage Banking Head,
Auto Loans Division
Head, Personal Loans
Head, Risk Management
Head
Overseeing the Bank’s
balance sheet structure
and deciding on
appropriate structural
mismatch, liquidity and
other asset and liability
positions; ensuring
effective management of
the Bank’s liquidity risks
Risk Management
Committee
3 members of the Board
with a supporting
management-level subcommittee comprised of
the President, Audit
Head, Compliance Head,
Operations Head, Credit
Head, Treasury Head,
Risk Management Head
Formulating policies and Monthly
strategies to manage and
limit the Bank’s risks and
recommending limit on
decision making authority
Audit Committee
Monthly
3 members of the Board, Responsible for
Internal Audit Head
emphasizing the
importance of
maintaining a sound
system of internal control
and the Board of
Directors’ oversight
functions
Trust Committee
President, Trust Officer, 3 Responsible for
members of the Board
establishing fiduciary
policies and principles
and monitors all trust
activities of the Bank
Corporate Governance
Committee
Meet as
4 members of the Board, Ensure that the
Necessary
conditions whereby the
3 of whom should be
Independent members
bank’s Board of Directors
and management acts
are in the interest of the
firm and its shareholders.
Weekly
Quarterly
Risk Management Unit
The Risk Management Unit (RMU) is a separate and an independent business function within
the Bank that has no risk-taking functions. It is the central resource for quantifying and
managing the portfolio of risks taken by the Bank as a whole. The RMU analyzes, implements,
maintains, develops, and communicates the RMC-approved risk management frameworks. It
also supports the ALCO and RMC in the performance of their responsibilities and in reporting
risk exposures to the BoD.
60
Treasury
The Treasury Group supports the ALCO by providing timely market information and executes
ALCO policies and decisions. It identifies profit opportunities, takes commensurate risk
positions, and actively monitors, evaluates and adjusts those positions in line with the Bank’s
objectives.
Credit Risk Management
Credit risk is the risk that obligations will not be repaid on time and in full as contracted,
resulting in a financial loss. It is the broadest category of risk in the bank and is closely linked
with other risk categories. Exposure to credit risk arises primarily from lending, sales and
trading activities. Managing credit risk has both qualitative and quantitative aspects. Credit
officers must evaluate the credit quality of the counter parties while an automated system
assigns an internal credit score on loan applications.
The Bank conducts a portfolio review that focuses on collections and classification of
accounts. The portfolio collections review also includes identification of delinquent accounts
and accounts to be written off. The classifications review involves a credit re-evaluation and
remedial management. Credit portfolio review is an ongoing activity done monthly.
The latest credit portfolio review was concluded in September 2005, resulting in changes in
the internal classification of some accounts due to delinquency, write-off level and some
qualitative factors. Credit process review has been incorporated into the bank’s credit
administrative and internal audit functions.
In managing credit risks, the Bank also estimates potential losses associated with credit
exposures. This process involves some judgment and considers a number of variables
including the credit quality of counter parties, tenor of the Bank’s credit exposure, default
probabilities and their volatilities, collateral values, expected recovery rates in the event of
default as well as the diversification across counter parties and industries.
Credit approval limits are established in the Delegation of Credit Authority manual. Continued
monitoring, evaluation, and supervision of credit risks is undertaken by the Credit
Administration Group, taking into account policies and guidelines established by senior
management. These limits are recommended by the ExeCom and approved by the BoD.
Market Risk Management
Market risk is the risk that the Bank’s earnings decline, either immediately or over time, as a
result of a change in market factors. The level of market risk to which the Bank is exposed
varies continually as a result of changing market expectations and changing market conditions
as well as the composition of the Bank’s trading and non-trading portfolios.
The Bank marks-to-market its trading portfolio to determine end of day profit & loss and
monitor stop-losses. To enhance the management of market risk exposures, the Bank uses
Daily Value-at-Risk (DVaR) to measure the possible maximum loss in the market value of its
trading portfolio.
Only the BoD, or its delegated authority, can approve Strategic Limits for the Bank. The
Treasury Head has the authority to design and approve detailed sub-limits within the
parameters established by RMC. RMC, supported by RMU, is responsible for managing the
trading market risk of the Bank. It aims to ensure that the Bank’s trading market risk position
conforms to policies and risk appetite of the Bank.
61
Structural Interest Rate Risk Management and Sensitivity
ALCO has the responsibility for managing structural interest rate exposure of the Bank. Its
primary focus is to achieve a desired overall interest rate profile, which may change over time
based on management’s long-term view of interest rates and economic conditions. ALCO, with
the support of RMU, reviews the composition of the Bank’s assets and liabilities including
interest rate mismatch positions.
The Bank maintains a prudent policy in managing its assets and liabilities to ensure that
exposure to fluctuations in interest rates is kept within acceptable levels.
A substantial portion of the Bank’s loan portfolio is on a fixed rate based on an internal
transfer-pricing rate reflective of market sources of funding. The average yield on loans as of
30 September 2005 is 13.50% while the average cost of deposits is 4.75%. The spread varies
for various types of peso loans and, as of 30 September 2005, averaged 6.39%.
Commercial loans are repriced every 30, 60 or 90 days while revolving loans are repriced
every 30 days. Mortgage loans are priced almost yearly. Personal and auto loans are not
repriced once granted.
The primary tool to measure the bank’s structural interest rate risk is the monthly interest rate
sensitivity gap report. The report also shows balance sheet positions together with
performances of the Bank’s major products. The interest rate gap profile is then subjected
to scenario analysis, which measures the impact of interest rate movements on gain/loss
assumptions.
Liquidity Risk Management
Liquidity means having available funds at all times to meet promptly all maturing liabilities,
including demand deposits and off-balance sheet commitments. Liquidity Risk relates to the
Bank’s ability to generate sufficient cash or equivalents from internal or external sources, in a
timely and cost-effective manner, to meet its commitments as they fall due. Mismanagement
of liquidity will have quicker and more severe repercussions than errors in managing other
risks.
The Bank’s objective in liquidity management is to ensure that the Bank has sufficient liquidity
to meet obligations under normal and adverse circumstances and is able to take advantage of
lending and investment opportunities as they arise.
ALCO and the RMC, supported by RMU, are responsible for managing the liquidity of the
Bank.
As of 30 September 2005, the scheduled maturity of the Bank’s investments securities is as
follows:
Table 22. Maturity of Investment Securities as of 30 September 2005
Tenor
%
1 to 5 years
5 to 10 years
Over 10 years
35.80
63.43
0.76
Source: PSBank
The Bank’s funding comes from its retail clients in the form of savings, current and time
deposits. Although majority of the Bank’s customer deposits are short-term, these are typically
rolled over at maturity, effectively providing the Bank with a source of long-term funds.
62
Operational Risk Management
Operations risk is the risk to earnings or capital arising from problems with service or product
delivery. This risk is a function of internal controls, information systems, employee integrity
and operating processes. Operations risk has a very broad category that encompasses ��any
risk not categorized as market, structural interest rate, liquidity, or credit risk’’.
Although presently unpredictable quantitatively, these types of risks may still cause severe
impact on the Bank’s profit and loss, and must be controlled primarily by processes and
procedures. Key factors in mitigating these risks are the development of both a strong ��control
culture’’, and an effective internal control system that constantly monitors and updates
operational policies and procedures of the Bank’s activities and transactions. The Bank’s
Audit Committee, supported by the Internal Audit Department, has the responsibility of
managing operations risks.
Other Risks
Legal Risk. Legal risk covers the potential for the Bank to suffer a financial loss due to nonexistent, incomplete, incorrect, and unenforceable documentation used by the Bank to protect
and enforce its rights under contracts and obligations. This risk is closely related to credit risk
as it most often involves legal problems with counterparties to the Bank’s transactions.
A legal review process, performed by the Legal Department, is the primary control mechanism
for legal risk. Other than just validating the existence, propriety and enforceability of
documents, the review also aims to verify the capacity and authority of counterparties and
customers to enter into transactions.
Regulatory Risk. Regulatory risk (also referred to as Compliance Risk) covers the potential
for the Bank to suffer a financial loss from changes in laws, monetary, tax, or other
governmental regulations of a country. This risk is increased in highly regulated jurisdictions,
and especially in turbulent market conditions when rules and regulations are constantly
changing. It is an important qualitative risk that must be monitored and managed, as
regulatory sanctions from non-compliance, especially in extreme cases, may involve not just
mere loss of reputation or financial penalties, but a revocation of banking charter or franchise.
The Bank’s Compliance functions are implemented by the Compliance Officer, who has the
responsibility to maintain an on-going monitoring and assessment of regulations, especially in
dynamic regulatory environments. Successful programs have the characteristic of clear
communication and rapid dissemination of new rules and regulations to all units, timely
analysis and addressing of all compliance issues, periodic and consistent compliance testing
for all products, and timely, clear and consistent reporting of compliance findings to the Audit
Committee.
Personnel Risk. Personnel risk covers the Bank’s risk of financial loss due to the
inadequate training, inexperience or illegal activities of risk-taking and other personnel. It
highlights the human side of risk-taking, role and adequacy of institutional trading guidelines,
codes of conduct, personnel policies, and training and development programs in overall bank
risk management.
Business Continuity Plan
The Bank’s operations are substantially automated with adequate safeguards to guarantee
business continuity during unforeseen events. It has designated a business recovery center in
another office building, not only as compliance to BSP regulations, but to affirm its
commitment to ensure continuous business and system operations in any kind of disaster
scenario. A Business Continuity Exercise was conducted in early September 2005 to test
critical systems, part of an annual exercise to ensure all critical systems continue operating
even during unforeseen events. All business units have dedicated resources to update the
bank’s Business Continuity Manual that covers back-up procedures, recovery procedures,
63
database synchronization procedures, systems hardware inventory, application inventory and
database allocation. The BSP has also given the Bank a certificate of substantial compliance
to minimum requirements provided under current regulations.
Corporate Governance
In compliance with the requirements of SEC Memorandum Circular No. 2 dated 5 April 2002,
the Bank submitted on 22 July 2002 its Code of Corporate Governance, which institutionalizes
the principles of good governance in the Bank. In observance of the provisions of the Code of
Corporate Governance, the Bank’s BoD designated Paterno Satur as Compliance Officer of
the Bank per approval of the Monetary Board. As Compliance Officer, Mr. Satur established
an evaluation system to determine and measure compliance with the Code of Corporate
Governance.
Capital Adequacy
The Bank’s capital funds as of 30 September 2005 amounted to Php5.01 billion. The Bank’s
capital ratio (the ratio of total capital to risk weighted assets) was 13.54%. This remains
above the BSP minimum requirement of 10.00% and the international standard of 8.00%.
The following table sets out the capital adequacy ratios of the Bank as of the dates indicated:
Table 23. Capital Adequacy Ratios
As of 30
September
(In percent)
As of 31 December
2005
2004
2003
Core Capital Ratio (Tier 1)
12.67
12.49
13.33
Total Capital Adequacy Ratio
13.54
12.46
13.30
Source: PSBank
The following table sets out a breakdown of the Bank’s capital base by category of capital as
of the dates indicated:
Table 24. Capital Base by Category
As of
30 September
As of 31 December
(In Php thousands)
2005
Tier 1 Capital
Paid-up common stock
Surplus
Surplus reserves
Undivided profits
Deductions from Tier 1
Unsecured DOSRI
Deferred income tax
Goodwill
Net Tier 1 capital
General Loan Loss Provisions
4,617,583
1,795,015
2,006,676
388,107
427,785
(748,029)
(345,201)
(384,141)
18,687
3,869,554
265,607
4,270,035
1,795,015
1,601,356
388,111
485,553
(749,723)
(434,072)
285,693
29,958
3,520,312
224,399
3,892,183
1,795,015
1,286,365
339,556
471,247
(754,937)
(547,215)
159,664
48,058
3,137,246
218,204
Total Gross Qualifying Capital
Deductions
4,135,161
3,744,711
0
3,355,450
Total Qualifying Capital
4,135,161
3,744,711
3,355,450
Source: PSBank
Note: Adjustments were made to conform with the audited balances.
64
2004
2003
The following table sets out the breakdown of the Bank’s risk-weighted assets by category as
of the dates indicated:
Table 25. Risk Weighted Assets by Category
As of 30
September
(In Php thousands)
2005
As of 31 December
2004
2003
On Balance Sheet Assets
20%
50%
75%
100%
125%
Off Balance Sheet Exposures
20%
50%
100%
Total risk — weighted interest rate and exchange
rate related
Gross risk — weighted assets
Deductions
393
2,751,048
6,736,581
19,846,594
1,956,465
0
350
2,424,341
—
26,511,737
22,278,073
0
0
0
31,291,081
748,029
0
28,936,428
749,723
0
24,289,642
754,937
Total risk-weighted assets
30,543,052
28,186,705
23,534,705
660
2,010,909
Source: PSBank
Insurance
It is the Bank’s policy to adequately insure all chattels and real estate collaterals are covered
during the term of the loan. It also adequately insures all of its properties including foreclosed
assets against fire and other usual risks. The Bank has mortgage redemption insurance that
covers the outstanding loan balances in the case of borrowers’ death. It likewise has credit
life insurance on all applicants for select mortgage and commercial loans.
The Bank also maintains insurance for operational risks. Financial losses due to employees’
infidelity or dishonesty, loss of money inside premises and loss of money in-transit are
covered by a bankers’ blanket bond.
The Bank does not maintain any personal liability insurance for senior officers or directors.
The Bank’s insurance policies are subject to exclusions, which are customary for insurance of
the type held by the Bank, including those exclusions that relate to war and terrorism-related
events.
Lastly, the Philippine Deposit Insurance Corporation covers the Bank’s deposits on a per
account basis up to Php250,000.00. The Bank believes that its insurance policies as
described above are appropriate for its business.
Legal Proceedings
The Bank is a party in legal proceedings that arise in the ordinary course of its business
activities. None of such legal proceedings arising in the ordinary course, either individually or
in the aggregate, are expected to have a material adverse effect on the Bank or its financial
condition.
In addition, the Bank together with a number of other banks in the Philippines has been
challenged by the BIR with respect to potential tax liability on interbank call loans (IBCL’s)
with more than 5 days term; and in connection with its practice of issuing passbooks for
higher interest rate deposit accounts. The BIR has claimed that documentary stamp tax is
payable on such transactions and has assessed the Bank for aggregate deficiency taxes of
65
approximately Php469.97 million for the taxable years 1995, 1996 and 1997. While the Bank
believes that it has a valid defense against these assessments pending with the Court of Tax
Appeal, it expects the proceedings to continue for some time in the future. However, given the
fact that a law was recently passed, which expressly provided for the imposition of
documentary stamp taxes on this type of deposit transactions, and considering its
prospective application, the Court of Tax Appeal will be properly guided in its determination
of the issues, and in the eventual resolution of the pending case.
Capital Expenditures
Capital expenditures, particularly in information technology, have been an integral part of the
Bank’s strategy in the past few years. The efficient use of technology is expected to further
speed up customer service, enhance productivity, improve management information
preparation and delivery, and promote more efficient internal and external business
communications which would result in new product innovations and more timely risk
management. It also minimizes operations at the branch level, thereby allowing branch
personnel to focus more on sales and customer service.
Capital expenditures relating to the development of the Bank’s information technology are as
follows:
Table 26 : IT-Related Capital Expenditures
2005
Capital Expenditures (in ’000)
Ratio to Income (in %)
82,296
19.24
2004
99,383
20.47
2003
143,255
30.40
2002
34,615
12.37
Source: PSBank
The Bank is expected to continue investing in both hardware and software to continually
improve on its delivery infrastructure and support its expansion of the consumer banking
business.
66
MANAGEMENT, EMPLOYEES, AND SHAREHOLDERS
ORGANIZATIONAL CHART
Directors
The names, ages, positions, and educational attainment of the Bank’s directors follow. The
members of the BoD are elected at the annual stockholders’ meeting to hold office until the
next annual meeting and until their respective successors have been elected.
Table 27. Board of Directors
Name
Position
Jose T. Pardo
Jovencio F. Cinco
Arthur V. Ty
Pascual M. Garcia III
Margaret Ty-Cham
Danilo L. Dolor
Jose Macario L. Laurel IV
Alberto A. Pedrosa
Regis V. Puno
David Ong Chua
Rolando A. Rodriguez
Chairman
Vice Chairman
Vice Chairman
Director/President
Director
Director
Director
Director
Director
Director
Corporate Secretary
Age
66
73
39
52
37
66
73
72
47
37
54
Source: PSBank
JOSE T. PARDO, Chairman: Mr. Pardo has been Chairman of the Bank since 2003. He is a
former Secretary of Finance. Mr. Pardo also significantly served as Chairman to other key
government organizations such as Landbank of the Philippines, Philippine Deposit Insurance
Corporation, Trade & Investment Development Corporation, Economic Coordinating Council,
67
among many others. Mr. Pardo earned a Masters degree in Business Administration from the
De La Salle University. He is the first graduate produced under the Harvard-DLSU Advisory
Program in 1963. He holds a Bachelor of Science degree major in Accounting from the same
university.
ARTHUR V. TY, Vice Chairman: Mr. Ty has been Vice Chairman of the Bank since 2003. Mr.
Ty is a Director of Metrobank Card Corp, Vice Chairman of Metropolitan Bank and Trust
Company, President of Systematics Technology Services, Inc, and Horizon Royale Holdings
Corporation. He was formerly the President of PSBank. Mr. Ty holds a Masters degree in
Business Administration from Columbia University.
JOVENCIO F.
2003. He is
PentaCapital
Incorporation.
CINCO, Vice Chairman: Mr. Cinco has been Vice Chairman of the Bank since
currently President and Director of PentaCapital Investment Corporation/
Finance Corporation. He is also Chairman of Intra Invest Securities
Mr. Cinco holds a Bachelor of Laws degree from Far Eastern University.
PASCUAL M. GARCIA III, Director/President: Mr. Garcia has been the President of the Bank
since September 2001. He is also part of the Board of Directors of Metrobank Card
Corporation. He was formerly the President and Director of the Bank of Southeast Asia and
DBS Bank Philippines, Inc. Mr. Garcia holds a Bachelor of Science degree major in
Commerce from Ateneo de Zamboanga.
MARGARET T. CHAM, Director: Ms. Cham has been one of the Bank’s Directors since 2003.
Ms. Cham is also the Director of Orix Metro Leasing Corporation. She is the Corporate
Secretary of Federal Land Inc., and Assistant Corporate Secretary of Baywatch Realty Corp.
Apart from these corporate involvements, Ms. Cham is also the active President of Joy In
Living Cancer Foundation. Ms. Cham holds a Bachelor of Science degree major in Humanities
from De La Salle University.
DANILO L. DOLOR, Director: Mr. Dolor has been a long time Director of the Bank. Mr. Dolor is
currently acting as Chairman to several other institutions such as YLFU Emilio Aguinaldo
College, St. Patrick School of Quezon City, House of Knowledge Inc., and Batangas Sugar
Central Inc. Mr. Dolor holds a Bachelor of Science degree major in Commerce from Colegio
De San Juan De Letran.
JOSE MACARIO LAUREL IV, Director: Mr. Laurel has been one of the Bank’s Directors since
April 2003. He is the Chairman Emeritus of President Jose P. Laurel Rural Bank. He was
formerly the Philippine Ambassador to Brazil and Congressman of the third district of
Batangas. He is a retired Colonel of the Philippine Army. Mr. Laurel holds a Bachelor of Laws
degree from the Lyceum of the Philippines.
ALBERTO A. PEDROSA, Director: Mr. Pedrosa has been one of the Bank’s Directors since
2002. He is also currently the Board Director of Petron Corporation, Vice Chairman and
Director of Peace Inc. He was formerly a Director of the Philippine National Oil Company, and
Philippine Ambassador to the European Union, Belgium and Luxembourg. Mr. Pedrosa holds a
Bachelor of Arts degree major in Economics from the University of the Philippines.
REGIS V. PUNO, Director: Mr. Puno has been one of the Bank’s Directors since May 2004.
He is Senior Partner at Puno and Puno Law Office, Director of Asia Recovery Corporation,
President and Director of Pasay Hongkong Realty Development Corporation, and Director/
Trustee of CBP-1 Association. He is formerly the Undersecretary of the Department of Justice.
Mr. Puno holds a Bachelor of Laws degree from the Ateneo de Manila University. He also
earned a degree in Masters of Laws International and Comparative Law from Georgetown
University Law Center.
DAVID ONG CHUA, Director: Mr. Chua joined the roster of the Bank’s Directors only in
September 2005. He is at present the President of Cathay Pacific Steel Corporation
(CAPASCO), Asia Pacific Capital Equities and Securities Corporation and Compass, Inc. He is
a former member of the Board of Directors of the Philippine Banking Corporation (which
merged with Global Business Bank — Metrobank) and PBC Capital and Investments
68
Corporation. He finished his Masters in Business Administration from the J.L. Kellogg School
of Management (Northwestern University) and Hong Kong University of Science and
Technology (HKUST) Graduate School of Management. He took his undergraduate studies
at St. Mary’s School of Management, graduated with honors, and finished Bachelor of Science
in Financial Services Management.
ROLANDO A. RODRIGUEZ, Executive Vice-President: Mr. Rodriguez is the Corporate
Secretary of the Bank. He has been the Executive Vice-President of the Bank since August
2003. He was formerly Senior Vice President for the Marketing & Retail Banking Group of
Equitable-PCI Bank. Mr. Rodriguez holds a Bachelor of Science major in Accounting and
Bachelor of Arts major in Economics degrees from De La Salle University.
Executive Officers
The names, ages, positions and educational attainment of the Bank’s executive officers follow.
The Executive Officers are appointed/elected by the BoD at the organizational meeting
following the stockholders’ meeting, each to hold office for a period of 1 year.
Table 28. Executive Officers Position
Position
President
Executive Vice President
Senior Vice Presidents
Senior First Vice President
First Vice Presidents
Vice Presidents
Name
Pascual M. Garcia III
Rolando A. Rodriguez
Jaime Valentin L. Araneta
Noli S. Gomez
Yolanda L. dela Paz
Consolacion R. Saur
Marieta Bernadette A. Sevilla
Elizabeth T. Miranda
Ma. Patricia L. CastanЛњ eda
Grace G. dela Cruz
Jose Jesus B. Custodio
Leonardo Roberto A. Disini
Rebecca R. Igot
Arnel R. Lopez
Adelisa A. Mijares
Paterno A. Satur
Arnold D. Tolentino
Ma. Priscilla M. Torres
Franklin S. Umadhay
Mary Jane M. Valero
Jose Martin A. Velasquez
Age
52
54
49
40
57
52
47
43
33
49
45
36
56
49
55
42
42
37
55
36
40
Source: PSBank
Aside from Mr. Pascual M. Garcia III, President, and Mr. Rolando Rodriguez, Executive Vice
President, the other key senior officers of the Bank are:
JAIME VALENTIN L. ARANETA, Senior Vice President: Mr. Araneta is the Head of the Bank’s
Branch Banking Group. He joined the Bank in August 2001. He used to be the Group Vice
President for Branches of Associates Finance Inc. (Citigroup), and Vice President for Head
Office Sales & Corporate Services of Jardine Pacific Finance Inc. He is also the former
General Manager of Business Works Inc. Mr. Araneta holds a Bachelor of Arts degree major
in Philosophy from Ateneo de Manila University.
NOLI S. GOMEZ, Senior Vice President: Mr. Gomez is the concurrent Head of the Bank’s
Operations Group and Finance Group. He joined the Bank in October 2001. He used to hold
the posts of Systems and Methods Risk Management Officer of DBS Bank Phil, Inc., and
69
System Management Officer from the Bank of the Philippines Islands (BPI). Mr. Gomez is a
Bachelor of Science degree holder in Civil Engineering from Mapua Institute of Technology
and is a licensed Civil Engineer.
YOLANDA L. DELA PAZ, Senior First Vice-President: Ms. Yolanda dela Paz is the Area Head
of Downtown Metro. She joined the bank in September 1983. She used to be the Supervisor
of Equitable Computer Services. She was also the Officer-in-Charge in one of the branches of
Equitable Banking Corporation. Mrs. Dela Paz holds a Bachelor of Business Administration
degree major in Accounting from University of the East.
CONSOLACION R. SAUR, First Vice President: Ms. Saur is the Head of the Bank’s Credit
Administration Group. She joined the Bank in November 2001. She used to be the Credit
Administration Head and Credit Cycle Division Head of DBS Bank Phils, Inc. She was also the
former Credit Acceptance Division Head of the Consumer Mortgage Loans of BPI Family Bank
and Credit Settlements Head for Consumer and Commercial Loans of Citytrust Bank. Ms.
Saur is a Certified Public Accountant. She holds a Bachelor of Science degree major in
Accounting from the University of Santo Tomas.
MARIETA BERNADETTE A. SEVILLA, First Vice President: Ms. Sevilla is the Head of the
Bank’s Commercial Banking Group. She joined the Bank in November 2004. She used to be
with PCIBank where she held the posts of Small Business Group Head, Specialized Lending
Unit Head, and Area Credit Marketing Officer. She was also previously connected with
BanCom as Project Finance Officer. Ms. Sevilla obtained her Masters in Business
Administration degree from the University of the Philippines, Diliman. She also graduated
with a degree in Bachelor of Science major in Business Economics from the same university.
ELIZABETH T. MIRANDA, First Vice President: Ms. Miranda is the Head of the Bank’s
Marketing and Communications Group. She joined the Bank in April 2002. She was previously
connected with Colgate-Palmolive as Category Marketing Manager, Senior Product Manager
and Category Financial Manager; MV Villar Group of Companies as Marketing Head;
Shoemart, Inc. as Audit Supervisor and Sycip, Gorres, Velayo and Co. as Senior Auditor.
Ms. Miranda is a CPA and holds a Bachelor of Science degree in Business Administration and
Accountancy from the University of the Philippines, Diliman.
MA. PATRICIA L. CASTANЛњ EDA, Vice President: Ms. CastanЛњ eda is the Chief Risk Officer of
the Bank reporting to the Risk Management Committee. She joined the Bank in August 2005.
Prior to joining PSBank, she was the Market Risk Officer of BDO Private Bank (formerly
Banco Santander Phils. Inc). She was also previously connected with TA Bank as Corporate
Finance Manager and with BPI as a Risk Management officer. Ms. CastanЛњ eda holds a
Bachelor of Science degree major in Business Economics from the University of the
Philippines, Diliman.
GRACE G. DELA CRUZ, Vice President: Ms. Grace Dela Cruz is the Division Head for
Processing Services Division under the Operations Group. She joined PSBank in January
2001. She was formerly Assistant Vice President for Retails Systems Support and Operations
of PCI Bank, and Assistant Vice President for Systems Support of Philippine Commercial
International Bank. Ms. Dela Cruz holds a Bachelor of Science degree major in Business
Administration from Mindanao State University.
JOSE JESUS B. CUSTODIO, Vice President: Mr. Jess Custodio is the Head of the Bank’s
Auto Loans Division. He joined PSBank in December 2001. He is the former Head for Auto
Loans Division - Retail Sales of Citytrust Banking Corporation. He also assumed the post of
Fleet and Floorstock Department Head under the Consumer Finance Division of BPI Family
Bank. Mr. Custodio holds a Bachelor of Science degree major in Business Management from
the Ateneo de Manila University.
LEONARDO ROBERTO A. DISINI, Vice-President: Mr. Bobby Disini is the Head of Mortgage
Banking Division. He joined the Bank in June 2003. Prior to PSBank, he held several
managerial posts in BPI including Unit Head/Senior Product Manager for BPI Express Credit
Card, Product Manager for Auto Loans and Repossessed Assets, and Accounts Officer/
70
Product Manager for Housing Loans. Mr. Disini obtained his Masters in Business
Administration from the University of the Philippines, Diliman and a Philosophy degree from
the same university.
REBECCA R. IGOT, Vice President: Ms. Igot is the Head of the Bank’s Internal Audit Group.
She joined the Bank in February 2002. She was formerly Vice President for Global Consumer
Bank Internal Audit Division of Citibank, Head for the Internal Audit Group of Asiatrust Bank,
and Head of Branch Accounting and Control Division of Global Business Bank. Ms. Igot is a
Certified Public Accountant. She holds a Bachelor of Science degree in Business
Administration major in Accounting from the University of the Philippines, Diliman.
ARNEL R. LOPEZ, Vice President: Mr. Lopez is Head of Branch Banking Group — Operations
Control and Administration Division. He joined the Bank in January 2002. He was formerly
Vice President and Area Head of Makati Branches of Globalbank. Mr. Lopez also worked as
Vice President and Area Head of Downtown Center Branches of Philbank. He started his
career in the consumer and retail banking divisions of Citytrust Banking Corporation. He
graduated from Adamson University with a Bachelor of Science degree in Industrial
Engineering.
ADELISA A. MIJARES, Vice President: Ms. Lisa Mijares is the Head of the Bank’s Loans
Operations Group. She joined the Bank in February 1998. She worked with BPI Bank as
Manager of Direct Marketing Department, and as Supervisor of the Appliance and Auto
Processing Section for Filinvest Finance & Leasing Corporation. She holds a Bachelor of
Science degree in Commerce major in Accounting from Far Eastern University.
PATERNO A. SATUR, Vice President: Mr. Pat Satur is the Head of the Bank’s Compliance
Office. He joined the Bank since August 1990. He is formerly PSBank’s Chief Accountant and
Senior Manager of Financial Accounting Services Department. Mr. Satur holds a Bachelor of
Science degree major in Accounting from Ateneo De Davao.
ARNOLD D. TOLENTINO, Vice President: Mr. Tolentino is the Head of the Bank’s Remedial
Management Group. He joined the Bank in September 2000. Prior to joining the Bank, he was
the ROPOA Manager under the Retail Banking Group of Solid Bank. Mr. Tolentino holds a
Bachelor of Science degree in Civil Engineering from Silliman University. He is a registered
civil engineer and has passed government licensure examinations for real estate brokers, real
estate appraisers and futures traders.
MA. PRISCILA M. TORRES, Vice President: Ms. Torres is the Head of the Bank’s Human
Resources Group. She joined the Bank in September 2000. She was the former Head of
Corporate Communications and Employee Relations Division under Human Resources
Management Group of SolidBank Corporation, and Department Head of Allied Bank’s
Corporate Affairs Department. She was also formerly with Planter’s Development Bank as
Marketing Services Officer. Ms. Torres holds a Bachelor of Arts degree in Communication
major in Journalism from the University of the Philippines, Diliman.
ATTY. FRANKLIN S. UMADHAY, Vice President: Mr. Umadhay is the head of the Bank’s Legal
Division. He was former head of the Bank’s credit division from 1993 to 2000. He earned his
Bachelor of Laws from Far Eastern University and has a Bachelor of Science degree major in
Accounting from Letran College.
MARY JANE M. VALERO, Vice President: Ms. Valero is the Head of the Bank’s Service
Quality Division. She joined the Bank in August 2002. She served as Duty Manager of Westin
Philippine Plaza and as Front Office Manager of Mandarin Oriental Manila. She also worked
with Far East Bank and Trust Company. Ms. Valero holds a Bachelor of Science degree major
in Psychology and a Bachelor of Arts degree major in Guidance and Counseling from St.
Scholastica’s College.
JOSE MARTIN A. VELASQUEZ, Vice President: Mr. Velasquez is the Head of the Bank’s
Treasury Division. He joined the Bank in September 2004. He was formerly Deputy Treasurer
of First Metro Investment Corporation and Senior Dealer of BPI Capital Corporation. Mr.
71
Velasquez holds a Masters degree in Business Administration from De La Salle University
Professional School of Business. He graduated with a Bachelor of Arts degree major in
Economics and Bachelor of Science in Commerce major in Management Financial Institution
from the same institution.
The following senior officers joined the Bank in October and November 2005 :
EDEZA A. QUE, Vice President: Ms. Que is Credit Risk Manager and reports to the Chief Risk
Officer and the Risk Management Committee. She was formerly with Standard Chartered Bank
as Risk Manager for Credit. She began her career in BPI where she was Actuarial Officer.
She then moved on to AIG where she was Risk Management Officer. She earned her Master
of Science Degree in Statistics and graduated cum laude with a degree in Bachelor of
Science major in Statistics both from the University of the Philippines, Diliman.
JAN NIKOLAI M. LIM, Vice President: Mr. Lim is Head of Personal Loans Division and reports
to the Office of the Executive Vice President. Prior to joining the Bank, Mr. Lim was with
Standard Chartered Bank as Senior Assistant Vice President for Credit Cards and Personal
Loans, and head of the Bank’s Cross Sell Team. Mr. Lim started his career as a Product
Associate at RFM Corporation. He graduated from the De La Salle University with a degree in
Bachelor of Science in Manufacturing Engineering and Management.
The following senior officer will join the Bank in early 2006 :
PERFECTO RAMON Z. DIMAYUGA, JR., First Vice President: Mr. Dimayuga was formerly
Head of Treasury Division at the Bank from June 2002 to May 2004 before he migrated to
Canada. Prior to joining the Bank, he was with the treasury departments of Bank of the
Philippine Islands and DBS Bank Phils, Inc. He also worked with Mindanao Development
Bank, Citytrust Banking Corporation, Rizal Commercial Banking Corporation and First
Malayan Development Bank. He graduated with Masters in Business Administration degree
from the University of the Philippines and has a Bachelor of Arts in Economics degree from
the Ateneo de Manila University.
Employees
As of 30 September 2005, the personnel complement of the Bank is comprised of 1,613
permanent and 112 probationary employees. Of the total, 35.00% are engaged in a
professional managerial capacity and classified as Bank Officers. The rank-and-file
employees of the Bank meanwhile account for 65.00% of the total as of the same period.
Although its rank and file employees are unionized, the Bank has been strike-free for its entire
history. It had its last Collective Bargaining Agreement (CBA) negotiations in December 2003.
Its current CBA is effective from January 2004 to December 2008. The Bank is slated to have
an economic CBA review every 3 years after a successful CBA or at the end of 2006. The
Bank recognizes the importance of becoming successful not only in its products and services
but also in its human resources. Emphasis is now on employee training and development to
achieve the Bank’s current mindset on operations quality and efficiency, service quality and
effective sales.
72
Shareholders
The Bank’s Top 10 shareholders as of 30 September 2005 are as follows:
Table 29. Top 10 Shareholders
Stockholder
% to Total
Metropolitan Bank & Trust Company
Danilo L. Dolor
Soledad L. Dolor
Erlinda L. Dolor
Fe Cecilia L. Dolor
PCD Nominee Corp. — Filipino
PSD TID
PCD Nominee Corp. — non-Filipino
James Go
Philippine Charter Insurance Corp.
74.236
5.627
5.023
4.563
4.563
1.122
1.045
0.840
0.107
0.097
Source: PSBank
The Bank’s principal shareholders are comprised of 2 major groups with Metrobank, owning
74.24%, and the Dolor Family collectively owning 19.78%. Other minority shareholders and
the public hold the balance of 5.99%.
As of 30 September 2005, the assets of Metrobank amounted to Php478.39 billion.
73
THE PHILIPPINE BANKING INDUSTRY
The following is a general discussion of the Philippine Banking Industry. It is based on the
laws, regulations and administrative rulings in force as at the date of this Offering Circular and
is subject to any changes in law occurring after such date, which changes could be made on
a retroactive basis. It does not purport to be a comprehensive description of all of the aspects
of the industry that may be relevant to a decision to purchase, own or dispose of the Notes.
Prospective purchasers should consult their advisors as to the consequences of acquiring,
holding and disposing of the Notes.
The banking industry in the Philippines is composed of universal banks, commercial banks,
savings banks, savings and mortgage banks, private development banks, stock savings and
loan associations, rural banks, and cooperative banks.
As of 31 March 2005, the commercial sector consisted of 42 commercial banks, of which there
are 21 private domestic banks and 21 branches of foreign banks and Government-controlled
banks. Of the 42 commercial banks, 18 are universal banks, of which 3 are foreign bank
branches.
Commercial banks are organized primarily to accept drafts and to issue letters of credit,
discount and negotiate promissory notes, drafts, bills of exchange and other evidences of
indebtedness, receive deposits, buy and sell foreign exchange and gold and silver bullion,
and lend money on a secured or unsecured basis. Universal banks are banks that have
authority, in addition to commercial banking powers, to exercise the powers of investment
houses, invest in the equity of business not related to banking and own up to 100.00% of the
equity in a thrift bank, a rural bank, or financial allied enterprise. A publicly-listed universal or
commercial bank may own up to 100.00% of the voting stock of only one other universal or
commercial bank.
Thrift banks primarily accumulate the savings of depositors and invest them, together with
their capital, in secured or unsecured loans, or in financing for home building and home
development, readily marketable debt securities, commercial paper and accounts receivable,
drafts, bills of exchange, acceptances, or notes arising out of commercial transactions. Thrift
banks also provide short-term working capital and medium- and long-term financing for
businesses engaged in agriculture, services, industry, housing, and other financial and allied
services for its chosen market and constituencies, especially for small and medium-sized
enterprises and individuals. As of 31 March 2005, there were 83 thrift banks.
Rural banks are organized primarily to make credit available and readily accessible in the
rural areas on reasonable terms. Loans and advances extended by rural banks are primarily
for the purpose of meeting the normal credit needs of farmers and fishermen, as well as the
normal credit needs of cooperatives and merchants. As of 31 March 2005, there were 757
rural banks.
Specialized government banks are organized to serve a particular purpose. The existing
specialized banks are the Development Bank of the Philippines (��DBP’’), Land Bank of the
Philippines (��LBP’’), and AI-Amanah Islamic Investment Bank of the Philippines (��AAIIB’’).
DBP was organized primarily to provide banking services catering to the medium- and longterm needs of agricultural and industrial enterprises, particularly in rural areas and preferably
for small- and medium-sized enterprises. LBP primarily provides financial support in all
phases of the Philippines’ agrarian reform program. In addition to their special functions, DBP
and LBP are allowed to operate as universal banks. AAIIB was organized to promote and
accelerate the socio-economic development of the Autonomous Region of Muslim Mindanao
through banking, financing, and investment operations and to establish and participate in
agricultural, commercial, and industrial ventures based on Islamic banking principles and
rulings.
During the past decade, the Philippine banking industry has been marked by 2 major trends:
the liberalization of the industry and mergers and consolidation.
74
Foreign bank entry was liberalized in 1994, enabling foreign banks to invest in up to 60.00%
of the voting stock of an existing bank or a new banking subsidiary, or to establish branches
with full banking authority. This led to the establishment of 10 new foreign bank branches in
1995. The General Banking Law of 2000 further liberalized the industry by providing that the
Monetary Board may authorize foreign banks to acquire up to 100.00% of the voting stock of
one domestic bank. Under the General Banking Law, any foreign bank, which prior to the
effectiveness of the said law availed itself of the privilege to acquire up to 60.00% of the
voting stock of a domestic bank, may further acquire voting shares of such bank to the extent
necessary for it to own 100.00% of the bank. As of 30 June 2003, there were 14 foreign
banks with branches and 5 foreign banks with subsidiaries in the Philippines, accounting for
13.80% of the total resources of the Philippine banking system.
The BSP has also been encouraging mergers and consolidations in the banking industry,
seeing this as a means to create stronger and more globally competitive banking institutions.
To encourage this trend, the BSP offers various incentives to merging or consolidating banks.
Based on BSP data, since the new package of incentives took effect in September 1998,
there have been 27 mergers, acquisitions, or consolidations of banks. However, while recent
mergers increased market concentrations, BSP studies showed that they were not enough to
pose a threat to the overall competition levels since market share remained relatively well
dispersed among the remaining players.
The following tables set out a comparison, based on published statements of condition, of the
10 leading banks in the Philippines as of 30 September 2005, and the 5 leading savings
banks in the Philippines in terms of assets, customer loans, deposits, capital, and ROE as of
30 September 2005.
Table 30. Comparative Summary of Top 10 Banks (As of 30 September 2005)
In Php millions, except in
branches
No of
Branches
Metropolitan Bank and Trust
Co
Bank of the Philippine
Islands
Equitable-PCIBank
Land Bank of the
Philippines
Philippine National Bank
Citibank NA
Banco de Oro
Development Bank of the
Phils
Rizal Commercial Banking
Corp
China Banking Corp
Rank in
terms of
Assets
Total
Assets
Rank in
terms of
Loans
Total Loans
562
1
478,388
1
214,219
538
408
2
3
388,448
312,067
2
3
158,511
118,889
323
324
6
180
4
5
6
7
296,056
220,246
209,356
202,123
4
9
5
6
107,257
54,031
76,964
72,767
77
8
187,750
7
72,202
178
141
9
10
160,272
132,142
8
10
56,005
48,730
Source: Published Statement of Condition
75
Table 31. Comparative Summary of Top 10 Banks (As of 30 September 2005)
Rank in
terms of
Deposits
In Php millions, except in
ROE
ROE
Metropolitan Bank and Trust Co
Bank of the Philippine Islands
Equitable-PCIBank
Land Bank of the Philippines
Philippine National Bank
Citibank NA
Banco de Oro
Development Bank of the Phils
Rizal Commercial Banking Corp
China Banking Corp
8.70%
16.70%
5.40%
12.80%
2.60%
33.70%
11.80%
14.90%
5.30%
15.70%
Total
Deposits
1
2
4
3
5
7
6
16
9
10
355,341
299,831
201,805
230,960
165,254
143,649
144,640
49,909
101,275
99,497
Rank in
terms of
Capital
2
1
3
4
5
14
8
6
11
7
Total
Capital
49,989
56,002
42,529
22,763
22,356
7,647
18,779
21,890
13,863
21,002
Source: Published Statement of Condition
Note: Data provided above are consolidated amounts with the exception of Citibank and LBP for which such numbers
are presented on a non-consolidated basis.
Table 32. Comparative Summary of Top 5 Thrift Banks, in terms of Assets
20-Dec-04
In Php Millions
Rank
BPI-Family Bank
Philippine Savings Bank
Planters Devt Bank
RCBC Savings
Asiatrust
1
2
3
4
5
30-Sep-05
Amount
63,685
46,016
32,100
31,645
12,300
Rank
1
2
3
4
5
Amount
Growth Rate
Rank
73,483
53,236
35,854
32,167
13,052
2
1
3
5
4
%
15.40%
15.70%
11.70%
1.70%
6.10%
Source: Published Statement of Condition
Table 33. Comparative Summary of Top 5 Thrift Banks, in terms of Loans
20-Dec-04
In Php Millions
Rank
BPI-Family Bank
Philippine Savings Bank
RCBC Savings
Planters Devt Bank
Equitable Savings
1
2
3
4
—
30-Sep-05
Amount
42,150
23,560
18,703
16,046
5,797
Rank
1
2
3
4
5
Amount
45,594
26,800
19,027
17,838
7,178
Growth Rate
Rank
4
2
5
3
1
%
8.20%
13.80%
1.70%
11.20%
23.80%
Source: Published Statement of Condition
Table 34. Comparative Summary of Top 5 Thrift Banks, in terms of Deposits
20-Dec-04
In Php Millions
Rank
BPI-Family Bank
Philippine Savings Bank
RCBC Savings
Planters Devt Bank
Asiatrust
1
2
3
4
5
30-Sep-05
Amount
49,685
40,065
27,981
20,014
9,185
Source: Published Statement of Condition
76
Rank
1
2
3
4
5
Amount
63,004
46,807
27,963
23,416
9,497
Growth Rate
Rank
1
3
5
2
4
%
26.80%
16.80%
-0.10%
17.00%
3.40%
Table 35. Comparative Summary of Top 5 Thrift Banks, in terms of Capital
20-Dec-04
In Php Millions
Rank
BPI-Family Bank
Philippine Savings Bank
ManilaBank
Planters Devt Bank
RCBC Savings
1
2
3
4
5
30-Sep-05
Amount
6,145
4,748
3,969
2,858
2,366
Rank
1
2
3
4
5
Amount
6,952
5,015
3,442
3,172
2,982
Growth Rate
Rank
2
4
5
3
1
%
13.10%
5.60%
-13.30%
11.00%
26.00%
Source: Published Statement of Condition
Table 36. Comparative Summary of Top 5 Thrift Banks, in terms ROE
20-Dec-04
In Php Millions
Rank
Asiatrust
Equitable Savings
Philam Savings
Philippine Savings Bank
BPI-Family Bank
—
3
—
4
1
30-Sep-05
Amount
3.40%
13.50%
8.70%
12.90%
16.10%
Rank
1
2
3
4
5
Amount
22.40%
21.50%
15.40%
14.20%
13.50%
Growth Rate
Rank
1
3
2
4
5
%
558.80%
59.30%
77.00%
10.00%
-16.20%
Source: Published Statement of Condition
Competition
The Bank faces competition from both domestic and foreign banks, in part as a result of the
liberalization of the banking industry by the Government. Since 1994, a number of foreign
banks that have greater financial resources than the Bank have been granted licenses to
operate in the Philippines. Such foreign banks have generally focused their operations on the
larger corporations and selected consumer finance products, such as credit cards. The foreign
banks have not only increased competition in the corporate market, but have as a result
caused more domestic banks to focus on the commercial middle-market, placing pressure on
margins in both markets.
In the domestic market prior to 2000, many banks expanded their networks in order to tap
low-cost retail deposits following the relaxation of restrictions on branch banking. As a result,
the Philippine banking market is relatively fragmented by comparison with other Asian
countries, with the top 10 banks accounting for approximately 72.05% of total assets of
commercial banks as of 27 June 2005. Since September 1998, the BSP has been
encouraging consolidation among banks in order to strengthen the Philippine banking
system. Consolidation is expected to result in greater competition, as a smaller group of
�top tier’ banks compete for business.
In addition, certain factors arising from the economic downturn are expected to result in
greater competition and therefore exert downward pressure on margins. From 2000 to 2002,
banks instituted more restrictive lending policies as they focused on asset quality and tried to
reduce their exposure to non-performing loans, increasing liquidity. As the Philippine economy
recovers from the economic downturn, and banks begin to apply such liquidity in the lending
market, greater competition for corporate, commercial, and consumer loans may arise.
The Bank is ranked 2nd among the country’s thrift banks in terms of assets as of 30
September 2005.
77
BANKING REGULATION AND SUPERVISION
The following is a general discussion of the Philippine Banking Regulation and Supervision. It
is based on the laws, regulations, and administrative rulings in force as at the date of this
Offering Circular and is subject to any changes in law occurring after such date, which
changes can be made on a retroactive basis. It does not purport to be a comprehensive
description of all of the laws, regulations, and administrative rulings of the Philippine banking
industry.
The New Central Banking Act of 1993 (Republic Act No. 7653) and the General Banking Law
of 2000 (the ��General Banking Law’’) (Republic Act No. 8791) vest the Monetary Board of the
BSP with the power to regulate and supervise financial intermediaries in the Philippines.
Financial intermediaries include banking institutions such as universal banks, commercial
banks, savings banks, mortgage banks, development banks, rural banks, stock savings and
loan associations, as well as branches and agencies of foreign banks in the Philippines.
Entities performing quasi-banking functions, trust companies, non-stock savings and loan
associations, and other non-deposit accepting entities, while not considered banking
institutions, are also subject to regulation by the Monetary Board.
The BSP’s Manual of Regulations for Banks (the ��Manual’’) is the principal source of rules and
regulations to be complied with and observed by banks in the Philippines. The Manual
contains regulations applicable to universal banks, commercial banks, savings banks, rural
banks, and non-bank financial intermediaries performing quasi-banking functions. These
regulations include those relating to the organization, management and administration, deposit
and borrowing operations, loans, investments and special financing programs, and trust and
other fiduciary functions of the relevant financial intermediary. Supplementing the Manual are
rules and regulations promulgated in various circulars, memoranda, letters, and other
directives issued by the Monetary Board.
The Manual and other BSP rules and regulations are principally implemented by the
Supervision and Examination Sector (the ��SES’’) of the BSP. The SES is responsible for
ensuring the observance of applicable laws and rules and regulations by banking institutions
operating in the Philippines (including Government credit institutions, their subsidiaries and
affiliates, non-bank financial intermediaries, and subsidiaries and affiliates of non-bank
financial intermediaries performing quasi-banking functions).
Permitted activities
A thrift bank (��TB’’), as defined in Thrift Bank Act of 1995 (Republic Act No. 7906), is
composed of: (i) savings and mortgage banks; (ii) stock savings and loan associations, and
(iii) private development banks.
In addition to the powers provided in other laws, a TB may perform any or all of the following
services: (i) grant loans, whether secured or unsecured; (ii) invest in readily marketable
securities, (iii) extend credit facilities , (iv) act as correspondent for other financial institutions,
(v) purchase, hold and convey real estate, (vi) engage in trust, quasi-banking functions and
money market operations, (vii) act as collection agent for government entities, (viii) act as
official depository of national agencies and of municipal, city or provincial funds in the
municipality, city or province, (ix) issue mortgage and chattel mortgage certificates, (x) accept
foreign currency deposits; (xi) issue domestic letters of credit and accept savings and time
deposits; (xii) invest in the equity of allied undertakings.
Financial allied undertakings include leasing companies, banks, investment houses, financial
companies, credit card companies, and financial institutions catering to small- and mediumscale industries, including venture capital companies, companies engaged in stock brokerage,
securities dealership and brokerage, and foreign exchange dealership/brokerage. Nonfinancial allied undertakings include warehousing companies, storage companies, safety
deposit box companies, management of mutual funds, companies providing computer
services, insurance agencies/brokerage, companies engaged in home building and home
78
development, companies providing drying and/or milling facilities for agricultural crops such as
rice and corn, and service bureaus organized to perform for and on behalf of banks and nonbank financial institutions the services allowed to be outsourced.
The total equity investments of a thrift bank in all enterprises are not permitted to exceed
25.00% of its net worth. A thrift bank is not allowed to invest in an enterprise engaged in nonallied or non-related activities. The Bank has only one equity investment in a financial
services company and is in compliance with this limit.
Banking regulation and supervision regulations
The Manual and various BSP regulations impose the following restrictions on commercial,
universal, and savings banks:
Minimum capitalization
Thrift banks with a head office in Metro Manila are required to have capital accounts of at
least Php400.00 million while thrift banks with head offices outside Metro Manila are only
required to have capitalization of at least Php64.00 million.
For purposes of these requirements, the Manual provides that capital shall be unimpaired
capital and surplus, combined capital accounts, and net worth, and shall refer to the combined
total of the unimpaired capital (including paid-in surplus), earned surplus, and undivided
profits, net of: (a) such unbooked valuation reserves and other capital adjustments as may be
required by the BSP; (b) total outstanding unsecured credit accommodations, both direct and
indirect, to DOSRI; (c) deferred income tax; (d) appraisal increment reserve (revaluation
reserve) as a result of appreciation or increase in the book value of bank assets; (e) equity
investment of a bank in another bank or enterprise (foreign or domestic) if the other bank or
enterprise has a reciprocal equity investment in the investing bank, although if such bank or
enterprise has reciprocal equity investment in the investing bank, the lower figure of the
investment of the bank or the reciprocal investment of the other bank or enterprise should be
used; and (f) in the case of rural banks, the Government counterpart equity, except those
arising from conversion of arrears under the BSP rehabilitation program.
Capital adequacy requirements
In July 2001, the Philippines adopted the capital adequacy framework of the Basel Committee
on Banking Supervision. The Manual provides that the net worth of a bank must not, as a
general rule, be less than an amount equal to 10.00% of its risk assets. This general rate
applies to the Bank. Under the Manual, net worth is synonymous with capital as defined
above. Risk assets are the total assets of the bank less assets such as (a) cash on hand; (b)
amount due from the BSP; (c) evidence of indebtedness issued by the Republic of the
Philippines and the BSP or fully guaranteed by the Republic of the Philippines; (d) loans to
the extent covered by hold-outs on, or assignment of, deposits/deposit substitutes maintained
with a lending bank in the Philippines; (e) loans or acceptances under letters of credit to the
extent covered by margin deposits; (f) bank premises net of depreciation; (g) furniture,
fixtures, and equipment, net of depreciation; (h) balances maintained with any bank
designated by the Monetary Board for clearing checks drawn on banks located in places
not serviced by the BSP clearing offices; (i) amounts due from foreign banks representing
normal working balances in the currencies eligible as part of the international reserve (and not
maintained in the form of savings, time or fixed deposits), but not to exceed 30.00% of
outstanding regular sight letters of credit; (j) portions of special time deposit loans covered by
Industrial Guarantee and Loan Fund (IGLF) guarantee; (k) real estate mortgage loans insured
by the Home Guaranty Corporation (HGC) to the extent of the amount of the insurance or the
outstanding loan, whichever is lower; (l) loans to the extent secured by assets in item (c); (m)
loans to the extent guaranteed by the Philippine Export and Foreign Loan Guarantee
Corporation which are not past due; (n) deferred income tax; (o) the portion of the peso loans
covered by guarantees of international/regional institutions where the Philippine Government
is a member/shareholder such as IFC and ADB; (p) outstanding balance of deposit accounts
of thrift banks with commercial banks/expanded commercial banks for clearing purposes; and
79
(q) loans of exporters to the extent guaranteed by the Guarantee Fund for Small and Medium
Enterprises and by the Small Business Guarantee and Finance Corporation which are not
past due.
On 11 November 2002, the BSP announced that it had approved higher limits for the amount
of lower and total tier 2 capital that may form part of the qualifying capital of Philippine banks.
It announced that it had raised the limits prescribed in its Circular No. 280 dated 29 March
2001 from (i) in the case of lower tier 2 capital, 25.00% to 50.00% of tier 1 capital, and (ii) in
the case of total tier 2 capital, 50.00% to 100.00% of tier 1 capital.
Pursuant to Monetary Board Resolution No. 150 dated 30 January 2003, the BSP issued
guidelines for the issuance of unsecured subordinated debt (��USD’’) eligible as tier 2 capital
on 17 February 2003, which regulate the private and public issuance of USD.
Reserve requirements
Under the New Central Bank Act, the BSP requires banks to maintain cash reserves and
liquid assets in proportion to deposits in prescribed ratios. If a bank fails to meet this reserve
during a particular week on an average basis, it must pay a penalty to the BSP on the amount
of any deficiency.
Thrift banks (including the Bank) are required to maintain regular reserves of 6.00% for
demand and savings deposits, Negotiable Order of Withdrawal accounts, time deposits and,
deposit substitutes. Regular reserve at the rate of 5.00% is required for bonds, mortgage and
chattel mortgage certificates and 0% for interbank call loans.
In addition to the foregoing regular reserve requirements, banks are required to set up
liquidity reserves against Peso demand, savings, and time deposits and deposit substitute
liabilities equivalent to 2.00%.
Loan limit to a single borrower
Under the General Banking Law, the total liabilities of any person, company, corporation, or
firm to a commercial banking corporation and to a savings bank for money borrowed shall at
no time exceed 25.00% of the net worth of such bank (or 30.00% of the net worth of the bank
in the event that certain types and levels of security are provided). Pursuant to the General
Banking Law, the Bank’s loans are subject to this single borrower’s limit. The basis for
determining compliance with a single borrower’s limit is the total credit commitment of the
bank to or on behalf of the borrower, which includes outstanding loans and other credit
accommodations, deferred letters of credit less margin deposits and guarantees. Except as
provided in the Manual, total credit commitment is determined on a credit risk-weighed basis
consistent with existing regulations. Among the loans excluded from determining the loan limit
are: (i) loans secured by obligations of the BSP or of the Republic of the Philippines; (ii) loans
fully guaranteed by the Republic of the Philippines as to payment of principal and interest; (iii)
loans to the extent covered by hold-out on or assignment of deposits maintained in the
lending bank and held in the Philippines; (iv) loans and acceptances under letters of credit to
the extent covered by margin deposits; (v) and other loans or credits which the Monetary
Board may from time to time specify as non-risk assets.
Trust regulation
The Manual contains the regulations governing the grant of authority to and the management,
administration, and conduct of trust, other fiduciary business, and investment management
activities of trust corporations and financial institutions allowed by law to perform such
operations. Trust corporations, banks, and investment houses may engage in trust and other
fiduciary business after complying with the requirements imposed by the Manual. Thrift Banks
applying for authority to perform trust and other fiduciary business must have a minimum
capital account of Php650.00 million or such amounts as may be required by the Monetary
80
Board in the future. Furthermore, the requirements provided under the Manual should be
complied with. The Bank may, under its Articles of Incorporation, accept and manage trust
funds and properties and carry on the business of a trust corporation.
Foreign currency deposit system
A foreign currency deposit unit (��FCDU’’) is a unit of a local bank or of a local branch of a
foreign bank authorized by the BSP to engage in foreign currency-denominated transactions.
Thrift banks with a net worth or combined capital accounts of at least Php650.00 million if
located in Metro Manila or Php150.00 million if located outside Metro Manila, subject to prior
Monetary Board approval, may be authorized to operate an FCDU. In general, FCDUs of such
banks may, in any acceptable foreign currency, (a) accept deposits and trust accounts from
residents and non-residents (without prior BSP approval); (b) deposit, on short-term maturity,
with foreign banks abroad, offshore banking units, and other FCDUs; (c) invest in foreign
currency-denominated debt instruments, which are of short-term maturity and are readily
marketable; (d) grant short-term foreign currency loans as may be allowed by BSP
regulations; (e) borrow on short-term maturity from other FCDUs, foreign banks abroad, and
offshore banking units subject to existing rules on foreign borrowings; and (f) engage in
foreign currency to foreign currency swaps with the BSP, offshore banking units, and FCDUs.
However, FCDUs of thrift banks may only carry on these activities on a short-term basis.
FCDUs are required to maintain a 100.00% cover for their foreign currency liabilities. For
purposes of complying with this requirement, the principal offices in the Philippines of the
authorized banks and all its branches located therein shall be considered as a single unit. The
foreign currency cover shall consist of (i) foreign currency deposits with the BSP; (ii) short
term foreign currency loans authorized by the BSP; (iii) investments in foreign currencydenominated debt instruments which are of short-term maturities and are readily marketable;
(iv) foreign currency notes and coins on hand; (v) foreign currency swaps; (vi) foreign
currency interest receivables; and (vii) such other assets as may be determined by the
Monetary Board as eligible cover.
FCDUs of thrift banks shall maintain the foreign currency cover in the same currency as that
of the corresponding foreign currency deposit liability.
Under the Republic Act No. 9294 which took effect on 21 May 2004, income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with non-residents, off-shore banking units in the Philippines and local
commercial banks including branches of foreign banks that may be authorized by the BSP
to transact business with foreign currency deposit system, is exempt from all taxes, except net
income from such transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income tax payable by
banks. However, interest income from foreign currency loans granted by such depository
banks under the said expanded system to residents other than the offshore banking units in
the Philippines or other depository banks under the expanded system shall be subject to a
10.00% final tax.
Lending policies, secured and unsecured lending
Banks are generally required to ascertain the purpose of a proposed loan. The purpose of the
loan shall be clearly stated in the application and in the contract between the bank and the
borrower and the proceeds of the loan are to be used for that purpose only. Prior to lending
on an unsecured basis, a bank must investigate the borrower’s financial condition and ability
to service the debt and must obtain certain documentation from the borrower, such as
financial statements duly certified by an independent Certified Public Accountant and tax
returns. Any unsecured lending should be only for a time period essential for completion of
the operations to be financed. In general, loans against real estate security shall not exceed
70.00% of the appraised value of the respective real estate security plus 70.00% of the
appraised value of insured improvements, and such loans shall not be made unless title to the
real estate is in the mortgagor. Loans and other credit accommodations on the security of
chattels and intangible properties shall not exceed 75.00% of the appraised value of the
security and such loans and other credit accommodations may be made to the title-holder of
81
the unencumbered chattels and intangible properties or his assignees. Loans for homebuilding and subdivision development for low and middle-income families against real estate
security and housing loans defined as loans granted for the purpose of constructing,
improving or acquiring a residential property which is rented or is occupied by the borrower
may be granted up to 80.00% of the appraised value of the real estate security.
Priority lending requirements
BSP regulations currently provide that banks should set aside an amount equivalent to
25.00% of their loanable funds for loans to the agricultural sector, with 10.00% of such funds
being made available exclusively to agrarian reform beneficiaries. By virtue of Rep. Act No.
7721, however, loans extended to finance educational institutions, cooperatives, hospitals and
other medical services, socialized or low-cost housing, and to local government units without
national government guarantee, will be considered as compliance to the agricultural-agrarian
loans required under Pres. Decree No. 717, as amended. Loanable funds are defined to
include the net increase in a bank’s funds from 1975. However, a bank may temporarily meet
all or a portion of its agrarian reform and agriculture lending requirements by investing in
certain government securities under certain conditions.
BSP regulations also provide that until August 2007, banks are required to set aside a certain
percentage of their total loan portfolio equal to at least 6.00% of the total loan portfolio for
small enterprises and 2.00% for medium-sized enterprises, based on their balance sheet as at
the previous quarter for lending to such enterprises. Investments in government securities will
not satisfy such obligation.
With the enactment of Barangay Micro Business Enterprises (BMBE’s) Act or R.A. 9178 on 13
November 2002, private banking and other financial institutions are encouraged to lend to
BMBEs. Among the incentives of the law is that all loans granted to BMBEs shall be
considered as part of the alternative compliance to the rules on reservations of funds for the
agricultural sectors and small and medium-sized enterprise.
Qualifications of directors and officers
Under the Manual, bank directors and officers must meet certain minimum qualifications. For
instance, directors must be at least 25 years old and have a college degree or at least 5
years’ business experience and must have attended a special seminar for the board of
directors conducted or accredited by the BSP, while officers must be at least 21 years old,
and have a college degree or at least 5 years’ experience in banking or trust operations or
related activities.
Certain persons are disqualified from acting as bank directors, including but not limited to (a)
persons who have been convicted by final judgment of the courts for offenses involving
dishonesty or breach of trust, violation of banking laws, moral turpitude or have been judicially
declared insolvent, spendthrift, or incapacitated to contract; (b) persons who have been
removed from office by the Monetary Board; (c) persons who refuse to disclose business
interests to the appropriate supervising and examining department of the BSP when required
for the proper implementation of a provision of law or of a circular, memorandum or rule or
regulation of the BSP; (d) resident directors who have been absent for more than half of
directors’ meetings and those who failed to attend the special seminar for board of directors
required by the BSP; (e) persons who are delinquent in their obligations or have been found
to have committed irregularities or to have conducted business in an unlawful, unsafe or
unsound manner as determined by the Monetary Board in any institution supervised by the
BSP; (f) persons who have been found to have willfully refused to comply with applicable
banking laws or regulations; and (g) persons who have been dismissed for cause from any
institution under the supervision of the BSP. When the ground for disqualification ceases to
exist, the director or officer concerned may subsequently become a director or officer of an
institution regulated by the BSP only upon approval of the Governor of the BSP. In addition,
except as permitted by the Monetary Board, directors or officers of banks are also generally
prohibited from simultaneously serving as directors or officers of other banks or non-bank
financial intermediaries.
82
Loans to DOSRI
The existing rules on loans to DOSRIs have 3 ceilings, namely, (a) individual ceiling; (b)
aggregate ceiling; and (iii) ceiling on unsecured loans.
The individual ceiling is the total allowable outstanding direct credit accommodations to each
DOSRI which should be an amount equivalent to his unencumbered deposits in the lending
bank and the book value of his paid-in capital contribution in the bank. The unsecured credit
accommodation or loan, however, should not exceed 30.00% of the DOSRI’s total loans.
The ceiling on unsecured loans, on the other hand, means that at least 70.00% of a DOSRI’s
credit accommodations must be secured.
In the aggregate, loans to DOSRI generally should not exceed 100.00% of the Bank’s
combined capital accounts or 15.00% of the total loan portfolio of the bank, whichever is
lower. Again, the ceiling on unsecured loans shall apply.
Valuation reserves for probable losses against loans
As a general rule, banking regulations define past due accounts of a bank as referring to all
accounts in a Bank’s loan portfolio, all receivable components of trading account securities,
and other receivables that are not paid at maturity. In the case of loans or receivables payable
in installments, banking regulations consider the total outstanding obligation past due in
accordance with the following schedule:
Table 33. Schedule of Past Due Recognition
Minimum Number of
Installments in Arrears
Mode of Payment
Monthly
Quarterly
Semi-annually
Annually
3
1
1
1
However, when the total amount of arrears reaches 20.00% of the total outstanding balance of
the loan or receivable, the total outstanding balance of the loan or receivable is considered
past due notwithstanding the number of installments in arrear.
BSP regulations allow loans and advances to be written off as bad debts only if they have
been past due for 6 months or more, and can be justified to be uncollectible. The board of
directors of a bank has the discretion as to the frequency of write-off, so long as these are
made against provisions for probable losses or against current operations. The prior approval
of the Monetary Board of the BSP is required to write off loans to DOSRI, and for individual
loan accounts involving Php100,000.00 or more the prior approval of the appropriate SES of
the BSP is needed.
On 26 January 2003, the Special Purpose Vehicle Act (the SPV Act) came into force. The
SPV Act provides the legal framework for the creation of private management companies that
will acquire non-performing loans, real estate, and other assets from financial institutions in
order to help these financial institutions liquidate their non-performing loans and assets and
thus provide new funds for new lending to support economic growth. Congress passed on 19
March 2003 the SPV Act’s implementing rules and regulations, which came into force on 12
April 2003.
83
Guidelines on general reserves
Under existing BSP regulations, a general provision for loan losses shall also be set up as
follows: (i) 5.00% of the outstanding balance of unclassified restructured loans less the
outstanding balance of restructured loans that are considered non-risk under existing laws
and regulations; and (ii) 1.00% of the outstanding balance of unclassified loans other than
restructured loans less loans that are considered non-risk under existing laws and regulations.
Restrictions on branch opening
Under the Thrift Banks Act, thrift banks have unrestricted branching right within the region,
free from any assessment or surcharges required in setting-up a branch, but under
coordination with the BSP. In line with this, the Manual provides various minimum
capitalization requirements for branches of thrift banks, depending on the location of the
branch, ranging from a minimum of Php0.00 for branches of thrift banks to be located in 5th
and 6th class municipalities to a minimum of Php10,000,000.00 for the same to be located in
the National Capital Region, provided that in no case shall the capitalization of the bank be
less than the minimum capitalization required for banks. A bank must first comply with this
minimum capital requirement in order to be given authority to establish more branches.
Only universal/commercial and thrift banks may establish branches on a nationwide basis.
Once approved, a branch may be opened within 6 months from the date of approval
(extendible for another 6 month period upon the presentation of justification). However, there
has been, since 19 September 1999, a BSP moratorium on the granting of licenses for the
establishment of new branches subject to certain exceptions.
Anti-money laundering law
The Anti-Money Laundering Act was passed on 29 September 2001 and was amended on 23
March 2003. Under its provisions, as amended, certain financial intermediaries, including
banks, offshore banking units, quasi-banks, trust entities, non-stock savings and loan
associations, all other institutions including their subsidiaries and affiliates supervised and/
or regulated by the BSP, and insurance companies and/or institutions regulated by the
Insurance Commission, are required to submit a ��covered’’ transaction report involving a
single transaction in cash or other equivalent monetary instruments in excess of
Php500,000.00 within one banking day.
These institutions are also required to submit a ��suspicious’’ transaction report if there is
reasonable ground to believe that any amounts processed are the proceeds of moneylaundering activities.
These transactions are reported to the Anti-Money Laundering Council (the ��AMLC’’) of the
BSP within 5 banking days of discovery of that transaction by the covered institution. The
Court of Appeals, upon application by the AMLC, has the authority to order any accounts
which it suspects are being used for money laundering to be frozen.
Institutions that are subject to the Anti-Money Laundering Act are also required to establish
and record the identities of their clients based on official documents. In addition, all records of
transactions are required to be maintained and stored for 5 years from the date of a
transaction. Records of closed accounts must also be kept for 5 years after their closure.
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PHILIPPINE TAXATION
The following is a general description of certain Philippine tax aspects of the Notes. It is
based on the laws, regulations, and administrative rulings in force as at the date of this
Offering Circular and is subject to any changes in law occurring after such date, which
changes can be made on a retroactive basis. It does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision to purchase,
own, or dispose of the Notes. Prospective purchasers should consult their tax advisors as to
the laws of other applicable jurisdictions and the specific tax consequences of acquiring,
holding, and disposing of the Notes.
As used in this section, the term ��resident alien’’ refers to an individual whose residence is
within the Philippines but who is not a citizen of the Philippines; a ��non-resident alien’’ is an
individual whose residence is not within the Philippines and who is not a citizen of the
Philippines; a non-resident alien who is actually within the Philippines for an aggregate period
of more than 180 days during any calendar year is considered a ��non-resident alien doing
business in the Philippines’’; otherwise, such non-resident alien who is actually within the
Philippines for an aggregate period of 180 days or less during any calendar year is
considered a ��non-resident alien not doing business in the Philippines.’’ A ��resident foreign
corporation’’ is a foreign corporation engaged in trade or business within the Philippines; and
a ��non-resident foreign corporation’’ is a foreign corporation not engaged in trade or business
within the Philippines. The term ��foreign’’ when applied to a corporation means a corporation
which is not domestic while the term ��domestic’’ when applied to a corporation means a
corporation created or organized in the Philippines or under its laws.
Taxation of Interest
The Philippine National Internal Revenue Code of 1997 (the ��Tax Code’’) provides that interest
on interest-bearing obligations of Philippine residents are Philippine-sourced income subject
to Philippine income tax. Generally, a final withholding tax at the rate of 20.00% is imposed
upon the amount of interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes. Thus, interest income on the Notes shall be subject to a final
withholding tax of 20.00% or such rate as may be provided by law or regulation, which shall
be withheld at source. Interest income received by non-resident individuals not engaged in
trade or business in the Philippines shall be subject to a final withholding tax of 25.00%.
Interest income received by non-resident foreign corporations shall be subject to a final
withholding tax of 35.00%. The tax shall be for the account of the affected holder. The
foregoing rates are subject to further reduction by any applicable tax treaty.
However, under the Tax Code, interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments with a maturity period of not less than 5
years, the form of which shall be prescribed by the BSP and issued by banks only (not by
non-bank financial intermediaries and finance companies) to individuals in denominations of
P10,000.00 and other denominations as may be prescribed by the BSP, is exempt from
income tax. Provided that, should the holder pre-terminate the deposit or investment before
the 5th year, a final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
4 years to less than 5 years — 5.00%;
3 years to less than 4 years — 12.00%; and
Less than 3 years — 20.00%.
Thus, all payments of principal and interest in respect of individual Noteholders who are (i)
Philippine citizens; (ii) resident aliens; and (iii) non-resident aliens engaged in trade or
business within the Philippines, shall be made free and clear of, and without withholding or
deduction for, any taxes, duties, assessments, or governmental charges of whatever nature
imposed, levies, collected, withhold, or assessed by or within the Philippines or any authority
therein or thereof having the power to tax, unless such withholding or deduction is required by
85
law. In such event, the Bank shall pay such additional amount as will result in the receipt by
such Noteholders of such amounts as would have been received by them had no such
withholding or deduction been required.
In accordance with Clause D(7)(e) of the BSP Rules, negotiations/transfers from one
Noteholder to another do not constitute pre-termination.
Documentary Stamp Taxes
Philippine law imposes a documentary stamp tax on all bonds, loan agreements, and
promissory notes at the rate of Php1.00 on every Php200.00 or fractional part of the face
value of such securities. The Bank has undertaken to pay the Philippine documentary stamp
taxes on the issuance of the Notes.
No documentary stamp tax will be due on a subsequent sale or disposition of the Notes.
Taxation on Sale or Other Disposition of Notes
A holder will recognize gains or losses upon the sale or other disposition (including a
redemption at maturity) of a Note in an amount equal to the difference between the amount
realized from such disposition and the value of such holder’s interest in the Note. Under the
Tax Code, any gain realized from the sale, exchange, or retirement of bonds, debentures, and
other certificates of indebtedness with an original maturity date of more than five years (as
measured from the date of issuance of such bonds, debentures, or other certificates of
indebtedness) is exempt from income tax. Since the Notes have a maturity of more than 5
years from the date of issuance, any gains realized by a holder from the sale of the Notes will
be exempt from Philippine income tax.
As mentioned above, under Philippine law, interest income on deposit substitutes received by
Filipino citizens and resident aliens is subject to a final withholding tax of 20.00%, which shall
be withheld at source. Interest income received by non-resident individuals not engaged in
trade or business in the Philippines shall be subject to a final withholding tax of 25.00%.
Interest income received by non-resident foreign corporations shall be subject to final
withholding tax of 35.00%. The said tax shall be for the account of the affected Noteholder,
and shall be withheld at source. The foregoing rates may be subject to further reduction by
any applicable treaty.
Transfer of the Notes between persons of different tax status shall be made effective only on
an Interest Payment Date (the ��Transfer Date’’). Any change in tax status shall be recorded
only upon submission of: (x) written notification of the transfer from the transferor; and (y) a
sworn statement of the tax status of the transferee claiming tax exemption/ preferential tax
treatment and other Tax Exempt/Tax Treaty Documents from such transferee, to the Issuer,
through the Registry.
Such change in tax status shall take effect beginning on the 1st day of the Interest Period
subsequent to the Transfer Date; provided that notification is made and sufficient Tax Exempt/
Treaty Documents are sent to the Issuer, through the Registry no later than 5 Banking Days
prior to the record date of such Interest Period, otherwise, the Registry shall be entitled to
presume, without liability to the Issuer, that the relevant Noteholder/Transferee is not taxexempt or does not enjoy preferential tax treatment. In such case, the change in tax status
arising from the transfer between a taxable and a tax-exempt individual shall take effect
starting from the Interest Period of the relevant record date on or before which a written
notification and submission of the Tax Exempt/Tax Treaty Documents are made which should
be no later than 5 Banking Days prior to the relevant record date.
In determining and recording such tax status, the Registry shall exercise such judgment and
care, under the circumstances then prevailing that individuals of prudence, discretion and
intelligence and familiar with such matters exercise in the management of their own affairs.
86
If tax status claimed is ��exempt’’ or ��reduced tax treaty rates’’, the Noteholder shall submit:
(iv) Certified true copy of the original tax exemption certificate, ruling or opinion issued by
the Bureau of Internal Revenue on file with the Noteholder as certified by its duly
authorized officer;
(v)
With respect to tax treaty relief, proofs to support applicability of reduced treaty rates,
consularized proof of tax domicile issued by the relevant tax authority of the Noteholder
and original or SEC-certified true copy of the SEC confirmation that the relevant entity is
not doing business in the Philippines;
(vi) Original of the duly notarized undertaking, in the prescribed form, declaring and
warranting its tax exempt status or entitlement to reduced tax treaty rates, undertaking
to immediately notify the Issuer and the Registry and Paying Agent of any suspension or
revocation of its tax exempt status or treaty privileges and agreeing to indemnify and
hold the Issuer and the Registry and Paying Agent free and harmless against any claims,
actions, suits, and liabilities resulting from the non-withholding or reduced withholding of
the required tax; and
(iv) Such other documentary requirements as may be required under the applicable
regulations of the relevant taxing or other authorities which, for purposes of claiming
tax treaty withholding rate benefits, shall include evidence of the applicability of a tax
treaty and consularized proof of the Noteholder’s legal domicile in the relevant treaty
state.
Gross Receipts Tax/Value Added Tax
The sale or transfer of the Notes in the Philippines by dealers in securities will be subject to
VAT at the rate of 10.00% of the gross income. However, R.A. 9337 provides that the
President may, at any time after January 1, 2006 and upon the recommendation of the
Secretary of Finance, raise the rate of VAT, to 12.00% after any of the conditions provided by
law has been satisfied. Pursuant to R.A. 9337, a gross receipts tax is imposed on the gross
receipts derived by financial institutions for all financial or non-financial services or
combinations thereof performed by financial institutions within the Philippines. For net
trading gains derived from debt securities, derivatives and other financial instruments, gross
receipt tax at the rate of 7.00% is imposed under the Tax Code.
Estate and Donor’s Tax
The transfer of Notes as part of the estate of a deceased foreign individual to his heirs,
whether or not such individual was resident in the Philippines at the time of his death, will be
subject to a state tax which is levied on the net estate of the deceased at progressive rates
ranging from 5.00% to 20.00% if the value of the net estate exceeds Php200,000.00. A holder
of such Notes will be subject to donor’s tax upon the donation of the Notes to strangers at a
flat rate of 30.00% of the net gifts. A stranger is defined as any person who is not a brother,
sister (whether by whole- or half-blood), spouse, ancestor and lineal descendant or relative by
consanguinity in the collateral line within the 4th degree of relationship to the Noteholder. A
donation to a non-stranger will be subject to a donor’s tax at progressive rates ranging from
2.00% to 15.00% based on net gifts made during the calendar year in excess of
Php100,000.00. The estate tax as well as the donor’s tax in respect of the Notes shall not
be collected (i) if the deceased at the time of death or the donor at the time of the donation
was a citizen and resident of a foreign country which at the time of his death or donation did
not impose a transfer tax of any character in respect of intangible personal property of
citizens of the Philippines not residing in that foreign country or (ii) if the laws of the foreign
country of which the deceased or the donor was a citizen and resident at the time of his death
or donation allows a similar exemption from transfer or death taxes of every character or
description in respect of intangible personal property owned by citizens of the Philippines not
residing in that foreign country.
87
PROCEDURE
The following summary is qualified in its entirety by, and should be read in conjunction with,
the more detailed information found elsewhere in this Offering Circular and the Agreements
regarding the issuance, maintenance, servicing, trading, and settlement of the Notes.
Prospective investors should read this entire Offering Circular and the Agreements fully and
carefully. In case of any inconsistency between this summary and the more detailed
information in this Offering Circular or the Agreements, then the more detailed portions and/or
the Agreements, as the case may be, shall at all times prevail.
Offering Period Procedure
Pursuant to the Underwriting Agreement, Selling Agency Agreement, Registry and Paying
Agency Agreement, and Trust Agreement (the ��Agreements’’) entered into by the Issuer with
the relevant counterparties, the Notes shall be offered for sale through the Lead Manager and
Selling Agents and, to a limited extent, through the Issuer (collectively, the ��Selling Agents’’).
The Notes will be offered to any person of legal age, regardless of nationality or residency, or
any corporation, association, partnership, trust account, fund or entity, regardless of place of
incorporation or domicile.
The following constitutes a summary of the procedure to be adopted among the parties and
the Investors and is qualified in its entirety by, and should be read in conjunction with, the
more detailed information found elsewhere in this Offering Circular and the Agreements.
Prior to the Offer Period
The Issuer shall enter into the Registry and Paying Agency Agreement with the Registry
(Development Bank of the Philippines — Trust Services Department), the Trust Agreement
with the Public Trustee (Development Bank of the Philippines — Trust Services Department),
and the Selling Agency Agreement with the Selling Agents (ING Bank N.V., Manila Branch,
Multinational Investment Bancorporation, and itself).
The Offer Period
During the relevant Offer Period, the Issuer, the Lead Manager, and other Selling Agents shall
solicit subscriptions to the Notes. Interested investors (the ��Applicants’’) will be required to
execute an Application to Purchase (the ��Applications’’) in 3 copies and return the completed
Applications to their respective Selling Agents. Each of the Selling Agents shall then provide a
receiving copy of the completed Applications to the Investor. There shall be no limitation on
the number of Notes that an Applicant may apply for.
Completed Applications shall be accompanied by check payments made out to the order of
��PSBank Notes Offering’’ or appropriate debit instructions or other instructions acceptable to
the Lead Manager and the relevant Selling Agent, as the case may be, and must cover the
entire purchase price (the ��Purchase Price’’). Each Selling Agent shall determine its own
settlement procedure for its Applicants. The Selling Agent shall hold the Purchase Price
received from their respective Applicants as deposit for the account of PSBank Notes Offering
(the ��Deposit’’).
A Schedule of Applications (the ��Schedule’’) summarizing the details on the Applicants and
corresponding subscriptions made shall then be separately prepared by each of the Selling
Agents at the end of the Offer Period, and together with one copy each of the completed
Applications, be sent to the Lead Manager for consolidation.
Allocation Period
On the 1st Banking Day after the end of the Offer Period, the Lead Manager shall summarize
the Schedule received from each of the Selling Agents as well as its own Schedule. Based on
the total Applications received, the Lead Manager shall agree with the Issuer on the total
88
issue size of the Notes. If the corresponding Notes are insufficient to satisfy all Applications,
the Lead Manager shall proceed with the manner of allocation and/or rejection of the
Applications, including the scaling down of allocations, and prepare an allocation report (the
��Allocation Report’’). The Lead Manager shall advise the Issuer and the Selling Agents of their
respective sub-allocations for the Notes based on their respective Schedule. Each of the
Selling Agents shall implement the allocation in accordance with the sub-allocation. Each of
the Selling Agents shall establish its own policies and procedures regarding allocations of the
Notes for its respective Applicants.
A schedule of purchase advice (the ��Schedule of Purchase Advice’’) summarizing the details
regarding the investors and corresponding allocations made shall be prepared by each of the
Selling Agents and delivered to the Lead Manager.
No later than the Issue Date, each of the Selling Agents shall forward to the Lead Manager
the total of the Purchase Price for all accepted Applications received by them via Real Time
Gross Settlement (��RTGS’’) or other means acceptable to the Lead Manager, and make
available to its corresponding Applicants any refunds that may be due them. Payments made
by Applicants whose Applications were rejected or scaled down shall be returned to them, in
full (in case of a rejection) or in a proportionate sum (in case of a scale down), but in both
instances shall carry no interest whatsoever.
The amounts received by the Lead Manager shall be placed in escrow for the account of
��PSBank Notes Offering’’, if applicable, or in a depository account with a Trust Department to
be identified by the Lead Manager and the Issuer.
Issue Date
Based on the Consolidated Schedule of Purchase Advice, the Issuer shall issue the Notes, at
the Offer Price, to the corresponding investors through the Public Trustee.
Upon mere acceptance by the Selling Agents, on behalf of the Issuer, of all or part of the offer
contained in an Application through the application of all or so much of the Deposit as
payment and the sending by the Selling Agent to the Applicant (with a copy furnished to the
Registry) of the proper Purchase Advice (the ��Purchase Advice’’), the Applicant shall ipso
facto be deemed a purchaser of the Notes covered by the accepted Application and the
relevant Application shall be deemed a purchase agreement with respect to the accepted
Application, fully binding the parties to the transaction under the stipulations of the Notes
hereof and other related documents.
On Issue Date, the Lead Manager shall release the net proceeds to the Issuer, which shall
then distribute the proceeds of the Notes to the proper parties in accordance with the relevant
Agreements.
The Registry shall receive, through the Lead Manager, all completed Applications to Purchase
from the Selling Agents and shall be responsible for processing such applications for
purposes of preparing the Registry Book and shall issue and distribute the relevant Registry
Confirmations to the investors.
Interest and Principal Payment Procedure
The Registry shall provide the Issuer with a report on the relevant Noteholders entitled to the
payment of interest and/or principal, the total gross amounts falling due as interest due to
each Noteholder, the tax status of each Noteholder for the relevant Interest Period, the
relevant tax, if any, to be withheld by the Registry on behalf of the Issuer on the income of
such Noteholder or the amount of grossing up required, as applicable; and such other
information relevant for the purposes. Upon receipt of the report, the Issuer shall promptly
transfer funds via RTGS to the Registry.
89
On each Payment Date, the Call Option Date, or the Maturity Date (as the case may be), the
Registry shall handle any and all payments to the relevant Noteholders in accordance with the
instructions on the Purchase Advice, either through direct debit of their accounts, through the
Noteholders’ Selling Agent or Market Maker via RTGS, or through Managers’ Checks, as may
be appropriate.
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SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN
INTERNATIONAL FINANCIAL REPORTING STANDARDS AND
PHILIPPINE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
To keep pace with the accounting development, the Philippine Accounting Standards Council
(ASC) decided in 1997 to move totally towards the adoption of International Financial
Reporting Standards (IFRS). The ASC has since issued a number of IFRS-based accounting
standards. Prior to 2004, there were 23 IFRS-based standards, which had been adopted
locally. In 2004, 3 new IFRS-based standards were adopted, while several others took effect
on January 1, 2005, including improvements introduced in 2003 to the previously adopted
standards. The ASC has re-named the new standards ��Philippine Accounting Standards
(PAS)’’ and ��Philippine Financial Reporting Standards (PFRS)’’ (collectively, Philippine GAAP)
to correspond with the adopted IASs and IFRSs of the International Accounting Standards
Board. Philippine GAAP differ with IAS/IFRS in certain aspects.
The financial statements included in the Offering Circular were prepared in accordance with
Philippine GAAP existing as of December 31, 2004 (i.e. do not include the new and revised
accounting standards which became effective starting January 1, 2005). The following
analysis is a general comparison of IFRS and Philippine GAAP existing as of December 31,
2004.
Reference should be made to the relevant IAS/IFRS and Philippine pronouncements for more
detailed information when applying the individual accounting standards.
The differences between Philippine GAAP and IAS/IFRS have not been quantified nor has a
reconciliation of Philippine GAAP to IAS/IFRS been undertaken. If the Bank had undertaken
any such quantification or reconciliation, it may have become aware of other potential
significant accounting and disclosure differences which are not identified below.
No attempt has been made to identify future differences between Philippine GAAP and IAS/
IFRS as the result of prescribed changes in accounting standards. Regulatory bodies that
promulgate Philippine GAAP and IAS/IFRS have significant projects ongoing that could affect
the accuracy of the following analysis in the future. In addition, no attempt has been made to
identify future differences between Philippine GAAP and IAS/IFRS that may affect the
financial statements as a result of transactions or events that may occur in the future.
Financial Instruments: Recognition and Measurement
There is no specific Philippine GAAP Standard which requires recognition of all financial
assets and financial liabilities, including all derivatives.
Under IAS, all financial assets and financial liabilities should be recognized on the balance
sheet, including all derivatives. Such assets and liabilities should be measured initially at cost,
which is the fair value of the consideration given or received to acquire the financial asset or
liability. Subsequent to the initial recognition, all financial assets, including derivatives that are
assets, shall be re-measured to fair values except for the following, which shall be subject to
review for impairment:
.
loans and receivables, which shall be measured at amortized cost using the effective
interest method;
.
held-to-maturity investments, which shall be measured at amortized cost using the
effective interest method; and
.
investments in equity instruments that do not have a quoted market price in an active
market and whose fair value cannot be reliably measured and derivatives that are linked
to and must be settled by delivery of such unquoted equity instruments, which shall be
measured at cost.
91
All derivative transactions, both stand-alone and bifurcated embedded derivatives, will have to
be carried at fair value directly through earnings except when these are designated and
qualify for hedge accounting. An entity must formally document, designate, and assess the
effectiveness of derivative transactions that receive hedge accounting treatment.
Financial Instruments: Disclosure and Presentations
There is no specific Philippine GAAP Standard which covers presentation and disclosure
requirements.
IAS requires a discussion of management’s policies for controlling the risk associated with
financial instruments, including policies regarding hedging of risk exposures, avoidance of
undue concentrations of risk and collateralization to mitigate credit risks, which provides a
valuable additional perspective that is independent of specific instruments outstanding at a
particular time. IAS also requires disclosure of the fair value of each class of financial asset
and liability.
Investment Properties
Philippine GAAP requires investments in real estate and income producing properties to be
carried at cost and depreciated as appropriate in the same manner as other properties.
Under Philippine GAAP, assets acquired in settlement of receivables are stated at the total
outstanding exposure at the time of foreclosure or bid price, whichever is lower, less
allowance for probable losses and impairment in value, if any. Nonrefundable taxes such as
capital gains tax and documentary stamp tax that were paid are capitalized provided that the
adjusted value of the foreclosed asset does not exceed net realizable values. Security,
maintenance and other foreclosure-related expenses are charged to operations as incurred.
Allowance for probable losses is set up based on BSP provisioning requirements and for any
anticipated significant shortfalls from the recorded values based on appraisal reports and
current negotiations and programs to dispose of these properties to other interested parties.
Upon adoption of IAS 40, Investment Property, these acquired assets shall be accounted for
as investment properties at fair value at the time of acquisition and subsequently carried at
either their fair values or their costs. Changes in fair value shall be recognized in the
statements of income.
Loans and Allowance for Probable Loan Losses
Under Philippine GAAP, the allowance for loan losses is the estimated amount of losses in a
bank’s loan portfolio and is established through charges against operation. The allowance
should be determined after a qualitative review of the collectibility of loans based on the net
realizable value of the collateral, credit history, industry trends, the borrowers’ financial
abilities, financial responsibility of guarantors and other factors. Loans are to be written off
when they are deemed uncollectible.
Any amounts set aside in respect of general banking risks, including future losses and other
unforeseeable risks or contingencies, are included in the determination of the net profit or loss
for the period. Industry practice in the Philippines is to also follow BSP rules with regard to
computing loan loss provisions.
IAS provides that loans originated by an enterprise which are excluded from fair valuation and
that have fixed maturity should be measured at amortized cost using the effective interest rate
method. Loans that do not have a fixed maturity should be measured at cost. Loans should be
subjected to review for impairment.
Where it is probable that the bank will not be able to collect all amounts due under a loan,
comprised of principal and interest, IAS provides that the amount of the resulting loss is the
difference between the asset’s carrying amount and the present value of expected future cash
flows discounted at the current effective interest rate determined under the loan contract. If
92
such loan is collateralized and foreclosure is probable, then the holder measures impairment
based on the fair value of the collateral. If, in subsequent period, the amount of the
impairment or bad debt loss decreases and the decrease can be objectively related to an
event occurring after the write-down, IAS provides that the write-down of the financial asset
should be reversed either directly or by adjusting an allowance account. The amount of
reversal should be included in the net profit or loss for the period. Once a loan has been
written down to its estimated recoverable amount, IAS provides that interest income should be
recognized based on the rate of interest that was used to discount the future cash flows for
the purpose of measuring the recoverable amount. Additionally, after initially recognizing an
impairment loss, the bank should review the asset for further improvements at subsequent
financial reporting dates.
IAS provides that provision for general banking risks should be separately disclosed as
appropriations of retained earnings. To the extent that such provision for general banking risks
is reduced, such amount of reduction should be recognized as an increase in retained
earnings and are not included in the determination of net profit or loss for the relevant period.
Disclosure in the Financial Statements of Banks and Similar Financial Institutions
Philippine GAAP does not require banks to disclose the maturities of assets and liabilities and
concentrations of assets and liabilities and off-balance sheet items. Current disclosure is
made to comply with the regulatory accounting policies through BSP Circular 212 which
requires that such information be disclosed in the same manner that IAS 30 requires such
disclosure.
IAS requires banks to disclose an analysis of their assets and liabilities classified into relevant
maturity groupings based on their remaining period at the balance sheet date up to their
respective maturity dates.
Other Matters
When resolving questions relating to subjects not specifically covered by Philippine SEC
rulings and Philippine GAAP, pronouncements of the International Accounting Standards
Board and other authoritative accounting bodies are generally referred to for guidance, but are
not mandatory.
93
The following is the list of IAS with differences with Philippine GAAP as of January 1, 2005.
IAS
Modification of IAS for the purpose of PAS/PFRS
IAS 1 Presentation of
Financial Statements
For purposes of financial reporting in the Philippines, reference
shall be made to PFRS, in lieu of IFRS in the following paragraphs
in IAS 1 : IAS 1.2; IAS 1.13; IAS 1.14 and IAS 1.105 (a).
In the Philippines, the common practice is to present in the
balance sheet current assets before non-current assets; current
liabilities before non-current liabilities; and equity accounts after
liabilities (equivalent to IAS 1.IG2).
IAS 19
Employee Benefits
For Philippine financial reporting purposes, the transition provision
includes the alternative treatment of recognizing the transitional
liability on a straight line basis over up to 5 years.
PAS 19 is applicable to benefits provided (a) under formal or
informal plans, (b) under legislative requirements and (c) by those
informal practices that give rise to a constructive obligation. In the
Philippines, these would include employee benefits provided for
under legislative requirements such as (a) social security
contributions paid by an employer and (b) employee benefits
provided under Republic Act 7641, Retirement Pay Law, which
provides for the payment of defined employee retirement benefits
to qualifying employees if an entity has no retirement plan or
agreement providing retirement benefits for its employees.
IAS 31
Interests In Joint
Ventures
For Philippine financial reporting purposes, reference to PFRS is
added to paragraph 2(c)(iv) of IAS 31, as follows:
2.
IAS 39
Financial Instruments:
Recognition and
Measurement
A venturer with an interest in a jointly controlled entity is
exempted from proportionate consolidation (IAS 31.30) and
equity method (IAS 31.38) when it meets the following
conditions:
a) ....
b) ....
c)
all of the following apply:
(i) ....
(ii) ....
(iii) ....
(iv) the ultimate or any intermediate parent of the
venturer produces consolidated financial statements
available for public use that comply with Philippine
Financial Reporting Standards or International
Financial Reporting Standards.
Transition and Initial Recognition of Financial Assets and Financial
Liabilities.
The amendment provides transitional relief from retrospective
application of the �day 1’ gain and loss recognition requirements
by allowing entities to adopt a transition option that is easier to
implement than that in the previous version of PAS 39. It gives
entities a choice of applying the �day 1’ gain or loss recognition
requirements in PAS 39 :
(a) retrospectively (as currently required by PAS 39);
(b) prospectively to transactions entered into after 25 October
2002; or
(c) prospectively to transactions entered into after 01 January
2004.
Effective date: Annual periods beginning on or after 01 January
2005
94
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
AUDITED FINANCIAL STATEMENTS
Statements of Condition as at 31 December 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . .
F-3
Statements of Income for the years ended 31 December 2004, 2003 and 2002 . . .
F-4
Statements of Changes in Capital Funds for the years ended
31 December 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Statements of Cash Flows for the years ended
31 December 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-8
UNAUDITED INTERIM FINANCIAL STATEMENTS
Statements of Condition as at 30 September 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . F-32
Statements of Income for the periods ended 30 September 2005 and 2004 . . . . . . . F-33
Statements of Changes in Capital Funds for the periods ended
30 September 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
Statements of Cash Flows for the periods ended 30 September 2005 and 2004 . . F-35
Notes to Unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
F-1
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
Philippine Savings Bank
PSBank Center, 777 Paseo de Roxas corner SedenЛњ o St.
Makati City
We have audited the accompanying statements of condition of Philippine Savings Bank as of
December 31, 2004 and 2003, and the related statements of income, changes in capital funds
and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Bank’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
Philippines. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Philippine Savings Bank as of December 31, 2004 and
2003, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles generally accepted
in the Philippines.
Renato J. Galve
Partner
CPA Certificate No. 37759
SEC Accreditation No. 0081-A
Tax Identification No. 102-087-055
PTR No. 9404006, January 3, 2005, Makati City
March 15, 2005
F-2
PHILIPPINE SAVINGS BANK
STATEMENTS OF CONDITION
December 31
2004
RESOURCES
Cash and Other Cash Items (Note 10)
Due from Bangko Sentral ng Pilipinas (Notes 10
and 13)
Due from Other Banks (Notes 13 and 21)
Interbank Loans Receivable (Notes 13 and 21)
Trading Account Securities — at market (Notes 4
and 13)
Available-for-Sale Securities — at market (Notes 4
and 13)
Investments in Bonds and Other Debt Instruments
— net (Notes 4, 10, 13 and 18)
Receivables from Customers — net (Notes 5, 13,
21 and 25)
Bank Premises, Furniture and Equipment — net
(Note 6)
Real and Other Properties Owned or Acquired —
net (Notes 7 and 25)
Deferred Tax Assets (Note 17)
Other Resources — net (Note 8)
2003
(As restated —
Note 2)
P
= 750,408,617
P
= 759,540,596
1,958,275,032
885,962,808
200,000,000
1,651,912,913
837,287,402
—
71,869,207
2,725,192
2,081,332,979
—
11,188,618,814
6,278,262,138
23,649,151,935
19,651,187,233
1,539,244,694
1,503,691,336
1,734,525,166
285,693,333
1,443,589,670
1,667,809,868
159,663,673
1,091,981,542
P
= 45,788,672,255
P
= 33,604,061,893
P
= 2,071,542,212
24,247,860,215
13,926,182,294
P
= 715,857,646
20,716,617,281
6,340,214,702
40,245,584,721
—
211,541,049
27,772,689,629
656,206,699
135,778,875
388,262,862
691,848,865
295,326,030
851,877,173
41,537,237,497
29,711,878,406
1,795,015,200
693,554,524
388,111,384
1,393,354,548
1,795,015,200
693,554,524
339,556,076
1,064,057,687
LIABILITIES AND CAPITAL FUNDS
Liabilities
Deposit Liabilities (Notes 10, 13 and 21)
Demand
Savings
Time
Bills Payable (Notes 11, 13 and 21)
Cashier’s and Gift Checks (Note 13)
Accrued Taxes, Interest and Other Expenses
(Note 13)
Other Liabilities (Note 12)
Capital Funds (Note 19)
Common stock
Capital paid in excess of par value
Surplus reserves (Notes 2 and 18)
Surplus (Notes 2 and 18)
Unrealized loss on available-for-sale securities
(Note 4)
See accompanying Notes to Financial Statements.
F-3
(18,600,898)
—
4,251,434,758
3,892,183,487
P
= 45,788,672,255
P
= 33,604,061,893
PHILIPPINE SAVINGS BANK
STATEMENTS OF INCOME
Years Ended December 31
2003
2002
(As restated — Note 2)
2004
INTEREST INCOME ON
Receivables from customers (Notes 5
and 21)
Investment securities (Note 4)
Deposits with other banks (Note 21)
Interbank loans receivable (Note 21)
INTEREST EXPENSE ON
Deposit liabilities (Notes 10 and 21)
Bills payable (Notes 11 and 21)
NET INTEREST INCOME BEFORE
PROVISION FOR PROBABLE
LOSSES
PROVISION FOR PROBABLE LOSSES
(Note 9)
NET INTEREST INCOME AFTER
PROVISION FOR PROBABLE
LOSSES
OTHER INCOME
Service charges, penalties, fees and
commissions
Profit from assets sold (Note 7)
Trading and securities gain — net
Miscellaneous (Note 14)
OTHER EXPENSES
Compensation and fringe benefits (Note
22)
Taxes and licenses (Note 17)
Occupancy and equipment-related
expenses (Note 15)
Depreciation and amortization (Note 6)
Security, messengerial and janitorial
services
Amortization of intangible assets
(Note 8)
Miscellaneous (Note 16)
P
= 2,779,165,110
850,223,688
44,818,999
33,336,391
P
= 2,164,088,626
490,646,263
42,032,136
28,051,851
P
= 1,798,424,772
430,353,931
35,983,676
56,969,232
3,707,544,188
2,724,818,876
2,321,731,611
1,737,422,306
8,997,457
1,186,956,173
9,788,728
909,708,779
2,298,081
1,746,419,763
1,196,744,901
912,006,860
1,961,124,425
1,528,073,975
1,409,724,751
120,900,000
127,136,284
31,446,032
1,840,224,425
1,400,937,691
1,378,278,719
381,597,929
88,476,861
81,758,557
93,603,339
258,354,701
7,608,585
201,767,608
82,970,700
212,953,563
7,930,840
177,704,333
24,132,016
645,436,686
550,701,594
422,720,752
778,912,625
226,099,705
686,643,256
13,014,802
621,331,466
110,619,456
202,886,226
178,824,029
164,573,185
142,735,104
142,426,926
108,127,730
109,026,783
82,118,000
91,028,690
47,861,572
494,707,279
38,207,053
406,808,281
30,099,484
400,019,226
2,038,318,219
1,534,099,681
1,503,652,978
INCOME BEFORE INCOME TAX
447,342,892
417,539,604
297,346,493
PROVISION FOR (BENEFIT FROM)
INCOME TAX (Note 17)
(38,210,189)
(53,707,286)
17,614,665
NET INCOME
P
= 485,553,081
P
= 471,246,890
P
= 279,731,828
P
= 2.71
P
= 2.63
P
= 1.56
Earnings Per Share (Note 20)
See accompanying Notes to Financial Statements.
F-4
PHILIPPINE SAVINGS BANK
STATEMENTS OF CHANGES IN CAPITAL FUNDS
Years Ended December 31
2004
COMMON STOCK — P
= 10 par value
Authorized — 425,000,000 shares
Issued — 179,501,520 shares
2003
2002
(As restated)
P
= 1,795,015,200
P
= 1,795,015,200
P
= 1,795,015,200
CAPITAL PAID IN EXCESS OF PAR
VALUE
693,554,524
693,554,524
693,554,524
SURPLUS RESERVES (Note 18)
Balance at beginning of year
Transfer from surplus
339,556,076
48,555,308
299,235,910
40,320,166
269,032,670
30,203,240
Balance at end of year
388,111,384
339,556,076
299,235,910
1,416,638,208
1,340,959,148
1,071,452,552
SURPLUS
Balance at beginning of year, as
previously reported
Effect of adoption of new standards on
accounting for:
Income tax (Note 2)
Leases (Note 2)
(317,220,037)
(35,360,484)
(395,387,621)
(25,238,132)
(382,485,839)
(18,161,906)
Balance at beginning of year, as
restated
Net income
Transfer to surplus reserves (Note 18)
Cash dividends (Note 19)
1,064,057,687
485,553,081
(48,555,308)
(107,700,912)
920,333,395
471,246,890
(40,320,166)
(287,202,432)
670,804,807
279,731,828
(30,203,240)
—
Balance at end of year
1,393,354,548
1,064,057,687
920,333,395
UNREALIZED LOSS ON AVAILABLEFOR-SALE SECURITIES (Note 4)
Balance at beginning of year
Unrealized loss during the year
—
(18,600,898)
—
—
—
—
Balance at end of year
(18,600,898)
—
—
P
= 3,892,183,487
P
= 3,708,139,029
P
= 4,251,434,758
See accompanying Notes to Financial Statements.
F-5
PHILIPPINE SAVINGS BANK
STATEMENTS OF CASH FLOWS
Years Ended December 31
2004
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax
Adjustments to reconcile income before
income tax to net cash generated from
operations:
Depreciation and amortization (Note 6)
Provision for probable losses (Note 9)
Profit from assets sold (Note 7)
Amortization of intangible assets
(Note 8)
Unrealized trading loss (gain) on
trading account securities (Note 4)
Changes in operating resources and
liabilities:
Decrease (increase) in amounts of:
Trading account securities
Receivables from customers
Other resources
Increase (decrease) in amounts of:
Deposit liabilities
Cashier’s and gift checks
Accrued taxes and other expenses
Other liabilities
P
= 447,342,892
2003
2002
(As restated)
P
= 417,539,604
P
= 297,346,493
178,824,029
120,900,000
(88,476,861)
142,735,104
127,136,284
(7,608,585)
108,127,730
31,446,032
(7,930,840)
47,861,572
38,207,053
30,099,484
(38,682)
(196,448)
(69,550,000)
(4,130,566,831)
(399,469,701)
9,088,512
(3,892,971,507)
(501,089,455)
(10,897,206)
(2,749,810,111)
(74,540,163)
12,472,895,092
75,762,174
88,653,428
(16,686,552)
5,443,303,358
(18,880,155)
62,273,213
225,280,842
5,771,243,858
58,447,328
72,457,091
162,921,219
Net cash generated from operations
Income taxes paid
8,727,895,227
(83,536,067)
2,044,975,586
(50,576,509)
3,688,714,467
(63,816,891)
Net cash provided by operating activities
8,644,359,160
1,994,399,077
3,624,897,576
—
—
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of available-for-sale
securities
Purchases of investments in bonds and
other debt instruments
Acquisitions of bank premises, furniture
and equipment (Note 6)
Disposal of bank premises, furniture and
equipment
405,985
(2,099,933,877)
(4,876,892,983)
(1,759,390,616)
(2,235,791,912)
(216,192,392)
(213,061,504)
(1,073,532,174)
1,815,005
10,323,958
74,332,905
Net cash used in investing activities
(7,191,204,247)
(1,962,128,162)
(3,234,991,181)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends paid (Note 19)
Net proceeds from (payment of) bills
payable
(251,042,668)
(106,907,815)
(178,799,190)
(656,206,699)
(143,793,301)
697,192,000
Net cash provided by (used in) financing
activities
(907,249,367)
(250,701,116)
518,392,810
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
545,905,546
(218,430,201)
908,299,205
(Forward)
F-6
Years Ended December 31
2004
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
Cash and other cash items
Due from Bangko Sentral ng Pilipinas
Due from other banks
Interbank loans receivable
CASH AND CASH EQUIVALENTS AT
END OF YEAR
Cash and other cash items
Due from Bangko Sentral ng Pilipinas
Due from other banks
Interbank loans receivable
2003
2002
(As restated)
P
= 759,540,596
1,651,912,913
837,287,402
—
P
= 532,832,207
811,896,670
1,622,442,235
500,000,000
P
= 438,434,642
240,995,530
799,441,735
1,080,000,000
3,248,740,911
3,467,171,112
2,558,871,907
750,408,617
1,958,275,032
885,962,808
200,000,000
759,540,596
1,651,912,913
837,287,402
—
532,832,207
811,896,670
1,622,442,235
500,000,000
P
= 3,794,646,457
P
= 3,248,740,911
P
= 3,467,171,112
See accompanying Notes to Financial Statements.
F-7
PHILIPPINE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
1.
Corporate Information
Philippine Savings Bank (the Bank) was incorporated in the Philippines on June 30, 1959
primarily to engage in savings and mortgage banking. The Bank’s shares are listed in the
Philippine Stock Exchange. The Bank offers a wide range of products and services such
as deposit products, loans, treasury and trust functions that cater mainly to the retail and
consumer market. On September 6, 1991, the Bank was authorized to perform trust
functions. As of December 31, 2004 and 2003, the Bank had 139 and 110 branches,
respectively, and 1,584 and 1,433 employees, respectively.
As of December 31, 2004, the Bank is seventy-four percent (74%) owned by Metropolitan
Bank & Trust Company (Metrobank).
The Bank’s principal place of business is located at PSBank Center, 777 Paseo de
Roxas corner SedenЛњ o St., Makati City.
2.
Summary of Significant Accounting Policies
Basis of Financial Statement Preparation
The Bank’s financial statements have been prepared in accordance with the accounting
principles generally accepted in the Philippines (Philippine GAAP) for the banking
industry.
Use of Estimates in the Preparation of the Financial Statements
The preparation of the financial statements in accordance with Philippine GAAP requires
the Bank to make estimates and assumptions that affect the reported amounts of
resources, liabilities, income and expenses, and disclosure of contingent resources and
contingent liabilities. Future events may occur which will cause the assumptions used in
arriving at the estimates to change. The effect of any change in estimates will be
reflected in the financial statements when they become reasonably determinable.
Changes in Accounting Policies
On January 1, 2004, the following new accounting standards became effective and were
adopted by the Bank:
.
Statement of Financial Accounting Standards (SFAS) 12/International Accounting
Standard (IAS) 12, Income Taxes, requires deferred income taxes to be determined
using the balance sheet liability method. The adoption of this accounting standard
resulted in a retroactive downward adjustment to surplus as of December 31, 2003,
2002 and 2001 amounting to P
= 317.2 million, P
= 395.4 million and P
= 382.5 million,
respectively. Net income increased by P
78.2
million
in
2003
and
decreased by
=
P
12.9
million
in
2002.
=
.
SFAS 17/IAS 17, Leases, prescribes the accounting policies and disclosures
applicable to finance and operating leases. The adoption of the standard resulted in
the recognition of lease payments under operating leases on a straight-line basis.
Previously, all leases under operating lease are recognized in the statements of
income on the basis of the terms of the lease agreement. The adoption of this
accounting standard resulted in a retroactive downward adjustment to surplus as of
December 31, 2003, 2002 and 2001 amounting to P
= 35.4 million, P
= 25.2 million and
P
18.2
million,
respectively.
Net
income
decreased
by
P
10.1
million
in 2003 and P
=
=
= 7.1
million in 2002.
Additional disclosures required by the new standards were included in the financial
statements, where applicable.
F-8
New accounting standards based on IAS and International Financial
Standards, referred to as Philippine Accounting Standards (PAS) and
Financial Reporting Standards (PFRS), respectively, will become effective in
Bank will adopt the following new accounting standards that are relevant to its
effective January 1, 2005 :
.
Reporting
Philippine
2005. The
operations
PAS 19, Employee Benefits, provides for the accounting for long-term and other
employee benefits. The standard requires the projected unit credit cost method in
determining the retirement benefits of the employees and a change in the manner of
computing benefit expense relating to past service cost and actuarial gains and
losses. It requires the Bank to determine the present value of defined benefit
obligations and the fair value of any plan assets with sufficient regularity that the
amounts recognized in the financial statements do not differ materially from the
amounts that would be determined at the statement of condition date.
Upon adoption of the standard in 2005, the difference between the present value of
the obligation and the fair value of the plan assets will be included in the statements
of condition and will be charged against surplus (see Note 22).
.
PAS 21, The Effects of Changes in Foreign Exchange Rates, provides restrictive
conditions for the capitalization of foreign exchange losses. The standard also
addresses the accounting for transactions in foreign currency and translating the
financial statements of foreign operations that are included in those of the reporting
enterprise by consolidation, proportionate consolidation and equity method. The
adoption of this standard will have no impact on the financial statements.
.
PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial
Institutions, provides for the required disclosure and presentation in respect of the
accounts of banks and similar financial institutions. It also provides that provision
for general banking risks is treated as appropriation of surplus and should not be
included in the determination of net income for the period. The Bank is in the
process of determining the effect of this standard in the context of the need to
reallocate the general reserve to cover any increase in specific loan reserves
required under PAS 39 (see discussion on PAS 39 below).
.
PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure
and presentation of all financial instruments. The standard requires more
comprehensive disclosures about the Bank’s financial instruments, whether
recognized or unrecognized in the financial statements. New disclosure
requirements include terms and conditions of financial instruments used by the
Bank, types of risks associated with both recognized and unrecognized financial
instruments (market risk, price risk, credit risk, liquidity risk, and cash flow risk), fair
value information of both recognized and unrecognized financial assets and
financial liabilities, and the Bank’s financial risk management policies and
objectives. The standard also requires financial instruments to be classified as
liabilities or equity in accordance with its substance and not its legal form.
.
PAS 39, Financial Instruments: Recognition and Measurement, establishes the
accounting and reporting standards for recognizing and measuring information about
the Bank’s financial assets and financial liabilities. The standard requires a financial
asset or financial liability to be recognized initially at fair value. Subsequent to initial
recognition, the Bank should continue to measure financial assets at their fair
values, except for loans and receivables and held-to-maturity investments, which
are measured at cost or amortized cost using the effective interest rate method.
Financial liabilities are subsequently measured at cost or amortized cost, except for
liabilities classified as ��at fair value through profit and loss’’ and derivatives, which
are subsequently measured at fair value.
F-9
PAS 39 also covers the accounting for derivative instruments. The standard has
expanded the definition of a derivative instrument to include derivatives (derivativelike provisions) embedded in non-derivative contracts. Under the standard, every
derivative instrument is recorded in the statements of condition as either an asset or
liability measured at its fair value. Derivatives that are not hedges are adjusted to
fair value through income. If a derivative is designated and qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in capital funds until the hedged item
is recognized in income. The Bank must formally document, designate, and assess
the effectiveness of derivative transactions that receive hedge accounting treatment.
The Bank has established a task force that will implement the provisions of PAS 32
and PAS 39 and assess the implications of these standards on the Bank’s financial
statements. To date, the Bank has not yet determined the impact of these standards
on the financial statements due to the following:
.
The Bank is still in the process of updating its system, processes and policies
which will incorporate the requirements of PAS 32 and 39.
.
The Bangko Sentral ng Pilipinas (BSP), through BSP Monetary Board (MB)
Resolution No. 1869 dated December 23, 2004, has given the banks and
financial institutions until December 31, 2005 to ready their infrastructures to
be PAS 32 and 39 compliant. Interim reports that will be submitted to the BSP
for 2005 need not be in compliance with the provisions of the said standards.
With respect to account classification and related measurement, the Bank has
already submitted to the BSP the reclassification of its trading and investment
securities portfolio. The Bank does not expect any further material impact on the
classification of financial assets and liabilities.
The Bank is currently adopting the effective interest rate method in amortizing
unearned discount related to loans. Therefore, the effect of the adoption of PAS 39
in so far as the amortization of unearned discount on loans is concerned will not be
material. With regard to the adoption of effective interest rate method in measuring
amortized cost for investments in bonds and other debt instruments (IBODI) and
available-for-sale securities (ASS), the effect has not yet been quantified since the
existing systems of the Bank have not yet been reconfigured to adopt effective
interest rate method of amortization. Due to the volume of transactions, it is
impracticable to compute for the financial impact manually. The Bank will report the
financial implications as soon as the information becomes available.
PAS 39 requires that in the absence of quoted market rates, the discounted cash
flow method will be used in determining whether an asset is impaired. The Bank will
adopt the net flow rate method for consumer loans and discounted cashflows
method for corporate accounts in determining asset impairment. The effect of
adopting this provision may be material for impaired loans and other receivables.
Currently, the adequacy of allowance for probable losses on loans and other
receivables is determined based on management criteria and BSP requirements.
The existing systems of the Bank have not yet been programmed to adopt the
discounted cash flow method. Due to the volume of transactions, it is impracticable
to compute for the financial impact manually. The Bank will report the financial
implications as soon as the information becomes available.
.
PAS 40, Investment Property, prescribes the accounting treatment for investment
property and related disclosure requirements. This standard permits the Bank to
choose either the fair value model or cost model in accounting for investment
property. Fair value model requires an investment property to be measured at fair
value with fair value changes recognized directly in the statements of income. Cost
model requires that an investment property should be measured at depreciated cost
F-10
less any accumulated impairment losses. The Bank is still in the process of
identifying real and other properties owned or acquired (ROPOA) accounts that will
be accounted for under PAS 40 and PFRS 5 (see significant provisions of PFRS 5
below), and which valuation model to be used under PAS 40. Regardless of
valuation model (either cost or fair value), the adoption of PAS 40 may result in a
material adjustment of prior years’ financial statements. The Bank has not yet
quantified the implication of PAS 40 since the system that will support the
accounting for ROPOA under PAS 40 has not yet been established. Due to the
volume of transactions, it is impracticable to compute for the financial impact
manually. The Bank will report the financial implications of PAS 40 as soon as the
information becomes available.
.
PFRS 2, Share-Based Payments, will result in a charge to net income for the cost of
share options granted. Currently, the Bank has no transaction involving share-based
payments but will comply with the requirements of this standard in respect of future
transactions.
.
PFRS 3, Business Combination, which will result in the cessation of the amortization
of goodwill and a requirement for an annual test for goodwill impairment. Any
resulting negative goodwill from a business combination after performing
reassessment will be credited to income. Moreover, pooling of interests in
accounting for business combination will no longer be permitted. The effect of
adopting this standard will not result in retroactive adjustment of prior years’
financial statements but will affect prospective financial statements as a result of
nonamortization of goodwill.
.
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies
the accounting for assets held for sale and the presentation and disclosure of
discontinued operations. It requires assets that meet the criteria to be classified as
held for sale to be measured at the lower of carrying amount and fair value less
costs to sell, and the depreciation on such assets to cease. Furthermore, assets
that meet the criteria to be classified as held for sale should be presented
separately on the face of the statements of condition and the results of discontinued
operations to be presented separately in the statements of income. Pending the
identification of the ROPOA accounts to be accounted for under PFRS 5, as
discussed under PAS 40 above, the effect of adoption of PFRS 5 with respect to the
assets to be accounted for under this standard will not be material to the financial
statements.
The Bank will also adopt in 2005 the following revised standards:
.
PAS 1, Presentation of Financial Statements, provides a framework within which an
entity assesses how to present fairly the effects of transactions and other events;
provides the base criteria for classifying liabilities as current or non-current;
prohibits the presentation of income from operating activities and extraordinary
items as separate line items in statements of income; and specifies the disclosures
about key sources of estimation uncertainty and judgments that management has
made in the process of applying the entity’s accounting policies. It also requires
changes in the presentation of minority interest in the statements of condition and
statements of income.
.
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes
the concept of fundamental error and the allowed alternative to retrospective
application of voluntary changes in accounting policies and retrospective
restatement to correct prior period errors. It defines material omission or
misstatements, and describes how to apply the concept of materiality when
applying accounting policies and correcting errors.
.
PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the statement of condition date.
F-11
.
PAS 16, Property, Plant and Equipment, provides additional guidance
clarification on recognition and measurement of items of property, plant
equipment. It also provides that each part of an item of property, plant
equipment with a cost that is significant in relation to the total cost of the item
be depreciated separately.
and
and
and
shall
.
PAS 17, Leases, provides a limited revision to clarify the classification of a lease of
land and buildings and prohibits expensing of initial direct costs in the financial
statements of lessors.
.
PAS 24, Related Party Disclosures, provides additional guidance and clarity in the
scope of the standard, the definitions and the disclosures for related parties. It also
requires disclosure of the compensation of key management personnel by benefit
type.
.
PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in
accounting for subsidiaries in consolidated financial statements and in accounting
for investments in the separate financial statements of a parent, venturer or
investor. Investments in subsidiaries will be accounted for either at cost or in
accordance with PAS 39 in the separate financial statements. Equity method of
accounting will no longer be allowed in the separate financial statements. This
standard also requires strict compliance with adoption of uniform accounting policies
and requires the parent to make appropriate adjustments to the subsidiary’s
financial statements to conform them to the parent’s accounting policies for
reporting like transactions and other events in similar circumstances.
.
PAS 28, Investments in Associates, reduces alternatives in accounting for
associates in consolidated financial statements and in accounting for investments
in the separate financial statements of an investor. Investments in associates will be
accounted for either at cost or in accordance with PAS 39 in the separate financial
statements. Equity method of accounting will no longer be allowed in the separate
financial statements. This standard also requires strict compliance with adoption of
uniform accounting policies and requires the investor to make appropriate
adjustments to the associate’s financial statements to conform them to the
investor’s accounting policies for reporting like transactions and other events in
similar circumstances.
.
PAS 31, Interests in Joint Ventures, reduces the alternatives in accounting for
interests in joint ventures in consolidated financial statements and in accounting for
investments in the separate financial statements of a venturer. Interests in joint
ventures will be accounted for either at cost or in accordance with PAS 39 in the
separate financial statements. Equity method of accounting will no longer be
allowed in the separate financial statements.
The Bank does not expect significant changes in the accounting policies when it adopts
the applicable revised standards in 2005. Additional disclosures required by the
applicable revised standards will be included, where applicable.
Cash and Cash Equivalents
Cash and cash equivalents include cash and other cash items, amounts due from BSP
and other banks and interbank loans receivable that are convertible to known amount of
cash with original maturities of three months or less from dates of placements and that
are subject to insignificant risk of changes in value.
Trading Account Securities (TAS)
TAS, which consist of government and private debt securities, are purchased and held
principally with the intention of selling them in the near term and are carried at fair
market value. Realized and unrealized gains and losses on these instruments are
recognized in Trading and Securities Gain — Net in the statements of income. Quoted
market prices, when available, are used to determine the fair value of trading
F-12
instruments. If quoted market prices are not available, fair market value is determined
using the discounted cash flows or using quoted prices of instruments with similar
characteristics.
When a security is transferred to TAS, the unrealized holding gain or loss at the date of
transfer is recognized in the statements of income immediately.
Available-for-Sale Securities
Securities are classified as ASS when purchased and held indefinitely, i.e., neither held
to maturity nor for trading purposes, where the Bank anticipates to sell in response to
liquidity requirements or in anticipation of changes in interest rates or other factors. ASS
are carried at fair market value and any unrealized gains or losses are reported as a
separate component of capital funds unless unrealized losses represent impairment
losses in which case such amounts are charged against income.
When a debt security transferred into ASS from IBODI, the unrealized holding gain or
loss at the date of the transfer shall be excluded from reported earnings and reported as
a separate component of capital funds until realized.
Investments in Bonds and Other Debt Instruments
IBODI are government and private debt securities where the Bank has the positive intent
and ability to hold to maturity and are carried at amortized cost on a straight-line basis.
An allowance is set up for any substantial and presumably permanent decline in the
aggregate carrying value of the investments. Under current BSP regulations, IBODI shall
not exceed 50% of adjusted statutory net worth plus 40% of total deposit liabilities.
Receivables from Customers and Allowance for Probable Losses
Receivables from customers are stated at the outstanding principal balance reduced by
unearned discounts and allowance for probable losses. Under current BSP regulations,
nonaccruing receivables are those that have been defined as past due and items under
litigation, or those for which, in the opinion of management, collection of interest or
principal is doubtful. Receivables are not reclassified as accruing until interest and
principal payments are brought current or the receivables are restructured in accordance
with existing BSP regulations, and future payments appear assured.
The allowance for probable losses on loans represents management’s estimate of
probable losses inherent in the portfolio, after consideration of prevailing and anticipated
economic conditions, prior loss experience, estimated recoverable values based on fair
market values of underlying collateral, prospects of supports from any financially
responsible guarantor, subsequent collections including, as appropriate, estimated cash
flows and on evaluations made by the BSP. The BSP observes certain criteria and
guidelines based largely on the classification of loans in establishing specific loan loss
reserves.
Allowance on other risk assets is maintained at a level considered adequate to provide
for potential uncollectibility of other risk assets. Management evaluates the level of this
allowance based on the factors that affect the collectibility of the accounts. A review of
age and status of these accounts, designed to identify accounts to be provided with
allowance, is made by the management on a continuing basis.
The allowance for probable losses is established through provisions for probable losses
charged against current operations. Receivables are written off against the allowance for
probable losses when management believes that the collectibility of the principal is
unlikely.
Bank Premises, Furniture and Equipment
Bank premises, furniture and equipment are stated at cost less accumulated depreciation
(except for leasehold improvements which is carried net of amortization) and any
impairment in value. The initial cost of bank premises, furniture and equipment consists
of its purchase price, including taxes and any directly attributable costs of bringing the
F-13
asset to its working condition and location for its intended use. Expenditures incurred
after the bank premises, furniture and equipment have been put into operation, such as
repairs and maintenance are normally charged against operations in the year in which
the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be
obtained from the use of an item of bank premises, furniture and equipment beyond its
originally assessed standard of performance, the expenditures are capitalized as
additional cost of bank premises, furniture and equipment. When assets are retired or
otherwise disposed of, the cost, and the related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is reflected
as income or loss in the statements of income.
Depreciation is determined using the straight-line method over the estimated useful life of
the respective assets. Leasehold improvements are amortized over the shorter of the
estimated average useful life of the improvements of five years or the terms of the
related leases.
The annual depreciation rates follow:
Building
Furniture, fixtures and equipment
Leasehold improvements
4%
20%
20% or the term of the lease,
whichever is shorter
The useful life and the depreciation and amortization method are reviewed periodically to
ensure that the period and the method of depreciation and amortization are consistent
with the expected pattern of economic benefits from items of bank premises, furniture
and equipment.
The carrying values of bank premises, furniture and equipment are reviewed for
impairment when events or changes in circumstances indicate that the carrying values
may not be recoverable. If any such indication exists and where the carrying values
exceed the estimated recoverable amounts, an impairment loss is recognized in the
statements of income (see accounting policy on Impairment of Assets).
Impairment of Assets
An assessment is made at each statement of condition date if there is any indication of
impairment of any asset, or if there is any indication that an impairment loss previously
recognized for an asset in prior years may no longer exist or may have decreased. If any
such indication exists, the asset’s recoverable amount is estimated at the higher of the
asset’s value in use or its net selling price.
An impairment loss is recognized by a charge against current operations for the excess
of the carrying amount of an asset over its recoverable amount. An impairment loss is
charged against operations in the year in which it arises.
A previously recognized impairment loss is reversed by a credit to current operations to
the extent that it does not restate the asset to a carrying amount in excess of what would
have been determined (net of any accumulated depreciation) had no impairment loss
been recognized for the asset in prior years.
Real and Other Properties Owned or Acquired
Resources acquired in settlement receivables are stated at the total outstanding
exposure at the time of acquisition or bid price, whichever is lower, less allowance for
probable losses and impairment in value, if any. Nonrefundable taxes such as capital
gains tax and documentary stamp tax which were paid by the Bank are capitalized,
provided that the adjusted value of the foreclosed asset does not exceed net realizable
value. Security, maintenance and other foreclosure-related expenses are charged against
operations as incurred. Allowance for probable losses is set up based on BSP
F-14
provisioning requirements and for any anticipated significant shortfalls from the recorded
values based on appraisal reports and current negotiations and programs to dispose of
these properties to other interested parties.
Intangible Assets
Intangible assets include goodwill, software costs and license fees. Intangible assets
acquired separately from a business are capitalized at cost. Intangible assets acquired
as part of an acquisition of a business are capitalized separately from goodwill if the fair
value can be measured reliably on initial recognition, subject to the constraint that,
unless the asset has a readily ascertainable market value, the fair value is limited to an
amount that does not create or increase any negative goodwill arising on the acquisition.
Software costs and license fees are being amortized over a period of five years on a
straight-line basis.
Intangible assets are carried net of amortization and any impairment in value. Goodwill
which arises from the purchase of branch offices from the Parent Company, is being
amortized over a period of five years from the date of purchase.
The carrying values of intangible assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Income Taxes
Deferred income tax is provided, using the balance sheet liability method, on all
temporary differences at the statement of condition date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences.
Deferred income tax assets are recognized for all deductible temporary differences,
carryforward of unused tax credits from excess minimum corporate income tax (MCIT)
over the regular corporate income tax and unused net operating loss carryover (NOLCO),
to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences and carryforward of unused MCIT and unused NOLCO
can be utilized. Deferred income tax, however, is not recognized when it arises from the
initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor
taxable profit or loss.
The carrying amount of deferred income tax assets is reviewed at each statement of
condition date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred income tax asset to be
utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are
applicable to the year when the asset is realized or the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the statement of
condition date.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will
flow to the Bank and the revenue can be reliably measured. The following specific
recognition criteria must also be met before revenue is recognized:
Interest Income
Unearned discount is recognized as income over the terms of the receivables using the
effective interest rate method.
Interest income on nondiscounted receivables is recognized based on the accrual
method of accounting, except in the case of nonaccruing receivables. Interest income on
nonaccruing receivables are recognized only to the extent of the cash collections
received.
F-15
Interest on interest-bearing placements and securities are recognized as the interest
accrues, taking into account the effective yield on the asset.
Loan Fees and Service Charges
Loan commitment fees are recognized as earned over the terms of the credit lines
granted to each borrower. Loan syndication fees are recognized upon completion of all
syndication activities and where the Bank does not have further obligations to perform
under the syndication agreement.
Service charges and penalties are recognized only upon collection.
Leases
Operating lease payments are recognized as an expense in the statements of income on
a straight-line basis over the lease term.
Retirement Cost
The Bank determines retirement cost under the projected unit credit method. Under this
method, the current service cost is the present value of retirement benefits payable in the
future with respect to services rendered in the current period. The accrued actuarial
liability is the present value of benefits payable in the future with respect to services
rendered to date. Unfunded past service costs, experience adjustments and any actuarial
gains or losses are amortized over the expected average remaining working life of the
employees. Retirement cost includes current service cost, amortization of past service
costs, interest on unfunded accrued retirement liability, experience adjustments and
actuarial gain or losses, if any.
Foreign Exchange Transactions and Translations
Foreign currency-denominated assets and liabilities are translated to Philippine pesos
using the Philippine Dealing System weighted average rates (PDSWAR) prevailing at the
end of the year. Income and expense items are translated at PDSWAR prevailing at
transaction dates. Exchange differences arising from reporting monetary items at rates
different from those at which they where previously recorded, as well as foreign
exchange gains or losses arising from foreign currency are credited to or charged
against operations in the year in which the rates change.
Provisions and Contingencies
Provisions are recognized when an obligation (legal or constructive) is incurred as a
result of a past event and where it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a reliable estimate can be
made of the amount of the obligation. If the effect of the time value of money is material,
provisions are determined by discounting the expected future cash flows at a pre-tax rate
that reflects current market assessment of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used, the increase
in the provision due to the passage of time is recognized as an interest expense.
Contingent liabilities are not recognized but are disclosed in the financial statements
unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets are not recognized but are disclosed in the financial statements when
an inflow of economic benefits is probable.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding, after giving retroactive effect to stock dividends declared,
stock rights exercised and stock splits made during the year.
Subsequent Events
Post-year-end events that provide additional information about the Bank’s position at the
statement of condition date (adjusting events) are reflected in the financial statements.
Post-year-end events that are not adjusting events are disclosed in the notes to the
financial statements when material.
F-16
3.
Segment Information
The Bank’s operating businesses are organized and managed separately according to
the nature of services provided and the different markets served with segments
representing strategic business unit. The Bank’s business segments are as follows:
Consumer Banking — principally handling individual customers’ deposits, and providing
consumer-type loans, overdrafts and fund transfer facilities;
Corporate Banking — principally handling loans and other credit facilities, and deposit
and current accounts for corporate and institutional customers; and
Treasury — principally providing money market, trading and treasury services, as well as
the managing of the Bank’s funding operations by use of treasury bills, government
securities and placements and acceptances with other banks, through treasury.
These segments are the bases on which the Bank reports its primary segment
information. Other operations of the Bank comprise the operations and financial control
groups. Transactions between segments are conducted at estimated market rates on an
arm’s length basis.
Primary segment information (by business segment) for the years ended December 31,
2004, 2003 and 2002 follows (in thousands):
2004
Consumer
Banking
Results of Operations
Net interest income
Noninterest income
Total revenue
Noninterest expense
P
= 1,400,493
411,052
P
= 545,483
149,237
Treasury
P
= 15,148
85,148
Total
P
= 1,961,124
645,437
694,720
(585,836)
100,296
(12,095)
250,258
—
108,884
—
88,201
—
P
= 250,258
P
= 108,884
P
= 88,201
P
= 485,553
Statement of Condition
Total resources
P
= 19,384,677
P
= 11,151,650
P
= 14,966,652
P
= 45,502,979
Total liabilities
P
= 17,243,166
P
= 9,617,713
P
= 14,676,358
P
= 41,537,237
Other Segment Information
Capital expenditures
P
= 173,083
P
= 42,303
P
= 806
P
= 216,192
Depreciation and
amortization
P
= 143,166
P
= 34,991
P
= 667
P
= 178,824
Income before income tax
Benefit from income tax
Net income
1,811,545
(1,561,287)
Corporate
Banking
F-17
2,606,561
(2,159,218)
447,343
(38,210)
2003
(As restated — Note 2)
Consumer
Banking
Results of Operations
Net interest income
Noninterest income
Total revenue
Noninterest expense
Income before income tax
Benefit from income tax
Net income
P
= 991,034
235,569
1,226,603
(1,078,442)
Corporate
Banking
P
= 524,656
112,925
637,581
(575,393)
Treasury
P
= 12,384
202,208
214,592
(7,401)
148,161
—
62,188
—
207,191
—
P
= 148,161
P
= 62,188
P
= 207,191
Total
P
= 1,528,074
550,702
2,078,776
(1,661,236)
417,540
(53,707)
P
= 471,247
Statement of Condition
Total resources
P
= 14,905,205 P
= 10,714,795
P
= 7,824,398 P
= 33,444,398
Total liabilities
P
= 13,019,937
P
= 8,894,540
P
= 7,797,401
P
= 29,711,878
Other Segment Information
Capital expenditures
P
= 166,654
P
= 45,681
P
= 727
P
= 213,062
Depreciation and amortization
P
= 111,646
P
= 30,602
P
= 487
P
= 142,735
2002
(As restated — Note 2)
Results of Operations
Net interest income
Noninterest income
Total revenue
Noninterest expense
Income before income tax
Provision for income tax
Net income
Consumer
Banking
Corporate
Banking
Treasury
P
= 1,007,056
159,209
P
= 435,923
84,782
P
= (33,254)
178,730
1,166,265
(1,061,557)
520,705
(449,270)
145,476
(24,272)
Total
P
= 1,409,725
422,721
1,832,446
(1,535,099)
104,708
—
71,435
—
121,204
—
297,347
17,615
P
= 104,708
P
= 71,435
P
= 121,204
P
= 279,732
Statement of Condition
Total resources
P
= 9,412,629 P
= 10,372,268
P
= 7,837,246 P
= 27,622,143
Total liabilities
P
= 7,552,072
P
= 8,609,856
P
= 7,799,380 P
= 23,961,308
Other Segment Information
Capital expenditures
P
= 839,705
P
= 230,167
P
= 3,660
P
= 1,073,532
Depreciation and amortization
P
= 84,576
P
= 23,183
P
= 369
P
= 108,128
Total resources do not include deferred tax assets amounting to P
= 285.7 million, P
= 159.7
million and P
47.3
million
as
of
December
31,
2004,
2003
and
2002.
=
4.
Trading and Investments Securities
TAS includes unrealized loss of P
= 0.41 million in 2004 and unrealized gain of P
= 0.04
million and P
0.20
million
in
2003
and
2002,
respectively.
=
As of December 31, 2004, ASS is carried net of accumulated unrealized loss of P
= 18.6
million.
F-18
IBODI account consists of:
2004
2003
Government bonds (Note 18)
BSP Treasury bills
Private bonds
Treasury notes
P
= 8,550,758,849
522,759,822
395,610,552
1,781,636,449
P
= 4,550,689,848
491,899,969
395,610,552
935,672,320
Less allowance for probable losses (Note 9)
11,250,765,672
62,146,858
6,373,872,689
95,610,551
P
= 11,188,618,814
P
= 6,278,262,138
As of December 31, 2004 and 2003, the market values of IBODI follow:
2004
Government bonds (Note 18)
BSP Treasury bills
Private bonds
Treasury notes
2003
P
= 8,497,610,816
555,737,087
397,114,107
1,755,933,540
P
= 4,524,959,426
474,589,678
408,693,558
1,078,332,322
P
= 11,206,395,550
P
= 6,486,574,984
Peso-denominated IBODI bear nominal annual interest rates ranging from 10.00% to
18.25% in 2004 and 4.57% to 18.25% in 2003, while foreign currency-denominated
IBODI bear nominal annual interest rates ranging from 8.25% to 9.38% in 2004 and
4.22% to 9.00% in 2003.
5.
Receivables from Customers
This account consists of:
2004
Loans and discounts
Bills purchased (Note 12)
P
= 26,074,259,049
141,555,213
26,215,814,262
(1,704,379,681)
(862,282,646)
Unearned discounts
Allowance for probable losses (Note 9)
P
= 23,649,151,935
2003
P
= 21,614,607,706
88,854,894
21,703,462,600
(1,388,854,925)
(663,420,442)
P
= 19,651,187,233
As of December 31, 2003, loans amounting to P
= 8.3 million were rediscounted with the
BSP (see Note 11). There were no rediscounted loans as of December 31, 2004.
Restructured loans as of December 31, 2004 and 2003 amounted to P
= 1,021.6 million and
P
1,235.8
million,
respectively.
=
As of December 31, 2004 and 2003, 48.45% and 71.23% of the total receivables were
subject to periodic interest repricing, respectively. Remaining receivables earned annual
fixed interest rates which averaged 20.10% in 2004 and 15.15% in 2003.
F-19
The breakdown of receivables from customers as to secured and unsecured and as to
type of security follows:
2004
Secured by:
Real estate
Chattel
Deposit hold-out
Securities
Others
Unsecured
%
2003
%
P
= 10,025,526,936
8,732,888,798
443,804,158
—
880,693,861
38.24
33.31
1.69
—
3.36
P
= 9,098,078,954
6,800,538,204
379,350,716
951,500,000
166,666,668
41.92
31.33
1.75
4.38
0.77
20,082,913,753
6,132,900,509
76.60
23.40
17,396,134,542
4,307,328,058
80.15
19.85
P
= 26,215,814,262
100.00
P
= 21,703,462,600
100.00
As of December 31, 2004 and 2003, nonaccruing loans follow:
2004
Secured
Unsecured
2003
P
= 978,841,674
598,446,102
P
= 1,062,624,031
243,767,843
P
= 1,577,287,776
P
= 1,306,391,874
Current banking regulations allow banks with no unbooked valuation reserves and capital
adjustments to exclude from nonperforming classification loans classified as Loss in the
latest examination of the BSP which are fully covered by allowance for probable losses,
provided that interest on said receivables shall not be accrued. As of December 31, 2004
and 2003, the nonperforming loans (NPLs) of the Bank not fully covered by allowance for
probable losses follow:
2004
Total NPLs
NPLs fully covered by allowance for probable
losses
2003
P
= 1,496,068,950
P
= 1,147,326,557
(325,638,000)
P
= 1,170,430,950
(325,638,000)
P
= 821,688,557
As of December 31, 2004 and 2003, the loan concentration as to economic activity
follows:
2004
Other community, social
and personal activities
Real estate
Wholesale and retail trade
Agriculture
Banks, insurance and other
financial institutions
Public utilities
Manufacturing
Services
Mining and quarrying
Others
%
2003
%
P
= 10,939,562,400
5,390,445,643
4,705,249,748
1,590,303,623
41.73
20.56
17.95
6.07
P
= 8,077,150,470
5,095,970,391
6,704,316,641
1,199,927,217
37.22
23.48
30.89
5.53
1,170,544,244
1,103,986,789
853,510,742
254,458,247
16,193,234
191,559,592
4.47
4.21
3.25
0.97
0.06
0.73
5,103,846
200,294,662
100,180,610
200,838,050
1,100,000
118,580,713
0.02
0.92
0.46
0.93
0.00
0.55
P
= 26,215,814,262
100.00
P
= 21,703,462,600
100.00
Thrift banks are not covered by the loan concentration limit of 30% as prescribed by
BSP.
F-20
6.
Bank Premises, Furniture and Equipment
The composition and movements in the bank premises, furniture and equipment account
follow:
2004
Land
Cost
Balance at beginning
of year
Acquisitions
Disposals/others
Balance at end of
year
Accumulated
Depreciation
Balance at beginning
of year
Depreciation
Disposals
Balance at end of
year
Net Book Value
Building
P
= 75,549,955
—
(1,800,000)
P
= 1,261,795,460
5,076,714
—
73,749,955
1,266,872,174
—
—
—
171,230,823
50,442,531
—
Furniture,
Fixtures and
Equipment
Leasehold
Improvements
2003
P
= 652,582,029
133,217,483
(21,539,514)
P
= 109,097,699
77,898,195
(38,924,376)
P
= 2,099,025,143
216,192,392
(62,263,890)
P
= 1,922,476,798
213,061,504
(36,513,159)
764,259,998
148,071,518
2,252,953,645
2,099,025,143
424,102,984
89,457,122
(21,524,509)
—
—
—
595,333,807
139,899,653
(21,524,509)
478,787,904
119,100,374
(2,554,471)
—
221,673,354
492,035,597
—
713,708,951
595,333,807
P
= 73,749,955
P
= 1,045,198,820
P
= 272,224,401
P
= 148,071,518
P
= 1,539,244,694
P
= 1,503,691,336
Depreciation and amortization amounted to P
= 178.8 million in
2003 and P
108.1
million
in
2002
(includes
amortization of
=
amounting to P
38.9
million
in
2004,
P
23.6
million
in 2003 and
=
=
7.
Total
2004, P
= 142.7 million in
leasehold improvements
P
= 17.1 million in 2002).
Real and Other Properties Owned or Acquired
This account consists of:
2004
ROPOA (Note 25)
Less allowance for probable losses (Note 9)
2003
P
= 1,815,221,138
80,695,972
P
= 1,861,516,446
193,706,578
P
= 1,734,525,166
P
= 1,667,809,868
Net gains from sale of ROPOA amounted to P
= 88.5 million in 2004, P
= 7.6 million in 2003
and P
= 7.9 million in 2002 are presented as Profit from Assets Sold in the statements of
income.
F-21
8.
Other Resources
This account consists of:
2003
(As restated)
2004
Accrued interest receivable (Note 13)
Sales contract receivable (Note 13)
Accounts receivable (Notes 13 and 21)
Intangible assets — net
Foreign currency notes and coins on hand
Other investments — at cost (Note 13)
Returned checks and other cash items
Prepaid expenses
Sundry debits
Miscellaneous
P
= 642,390,192
386,512,812
251,133,965
95,357,606
60,057,711
51,492,562
37,019,258
26,534,929
23,947,877
89,032,339
P
= 431,490,058
234,281,472
170,558,455
110,322,826
43,827,814
61,202,466
54,487,796
17,124,917
25,823,288
94,239,936
Less allowance for probable losses (Note 9)
1,663,479,251
219,889,581
1,243,359,028
151,377,486
P
= 1,443,589,670
P
= 1,091,981,542
Sales contract receivable earned interest rate ranging from 10.40% to 11.62% in 2004
and 5.19% to 10.95% in 2003.
The composition and movements of intangible assets follow:
2004
Software
Cost
9.
Goodwill License Fees
Balance at beginning of year
Additions
Amortization
P
= 56,197,821
14,146,352
(23,819,905)
P
= 48,058,338
5,500,000
(23,600,000)
Balance at end of year
P
= 46,524,268
P
= 29,958,338
Total
2003
P
= 6,066,667 P
= 110,322,826 P
= 106,188,994
13,250,000
32,896,352
42,340,885
(441,667)
(47,861,572)
(38,207,053)
P
= 18,875,000
P
= 95,357,606
P
= 110,322,826
Allowance for Probable Losses
Changes in the allowance for probable losses are as follows:
Balance at beginning of year:
IBODI
Receivables from customers
ROPOA
Other resources
2004
2003
P
= 95,610,551
663,420,442
193,706,578
151,377,486
P
=—
839,017,613
34,346,605
142,594,939
1,104,115,057
120,900,000
—
Provisions charged against operations
Accounts charged off
Balance at end of year:
IBODI (Note 4)
Receivables from customers (Note 5)
ROPOA (Note 7)
Other resources (Note 8)
F-22
1,015,959,157
127,136,284
(38,980,384)
P
= 62,146,858
862,282,646
80,695,972
219,889,581
P
= 95,610,551
663,420,442
193,706,578
151,377,486
P
= 1,225,015,057
P
= 1,104,115,057
With the foregoing level of allowance for probable losses, management believes that the
Bank has sufficient level of allowance to take care of any losses that the Bank may incur
from the noncollection or nonrealization of its receivables from customers and other risk
assets.
10. Deposit Liabilities
Available reserves as of December 31, 2004 and 2003 follow:
2004
Cash
Due from BSP
IBODI
2003
P
= 921,908,075
1,959,139,050
593,082,063
P
= 756,239,176
1,609,348,655
462,982,286
P
= 3,474,129,188
P
= 2,828,570,117
Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity
reserve equivalent to 2% and statutory reserve of 6%. As of December 31, 2004 and
2003, the Bank was in compliance with such regulation.
As of December 31, 2004 and 2003, 71.06% and 63.16% of the deposit liabilities were
subject to periodic interest repricing, respectively. Remaining deposits earned annual
fixed interest rate which averaged 4.75% in 2004 and 5.02% in 2003.
11. Bills Payable
In 2003, this account consists of:
2003
Interbank call loans
Rediscounted loans (see Note 5)
P
= 650,000,000
6,206,699
P
= 656,206,699
Interbank call loans were subject to annual fixed interest rates ranging from 6.87% to
7.50%. Rediscounted loans were subject to annual fixed interest rate of 4.17%.
12. Other Liabilities
This account consists of:
2004
Accounts payable (Note 13)
Bills purchased-contra (Note 13)
Other credits (Note 13)
Dividends payable (Notes 13 and 19)
Withholding taxes payable (Note 13)
Sundry credits
Miscellaneous
2003
P
= 300,239,138
137,067,612
80,616,882
37,655,191
35,888,285
25,261,370
75,120,387
P
= 376,699,700
88,854,894
38,013,452
180,996,947
25,709,341
43,301,905
98,300,934
P
= 691,848,865
P
= 851,877,173
Accounts payable includes payable to suppliers and service providers and payments for
principal, interest and other charges received from customers in advance.
F-23
13. Maturity Profile of Financial Resources and Financial Liabilities
The following tables present the financial resources and financial liabilities by contractual
maturity and settlement dates as of December 31, 2004 and 2003 :
2004
Financial Resources
Due from BSP
2003
Due Within
Due Beyond
One Year
One Year
Total
Due Within
Due Beyond
One Year
One Year
Total
P
= 1,958,275,032
P
=—
P
= 1,958,275,032
P
= 1,651,912,913
P
=—
P
= 1,651,912,913
Due from other banks
885,962,808
—
885,962,808
837,287,402
—
837,287,402
Interbank loans receivable
200,000,000
—
200,000,000
—
—
—
38,425,084
33,444,123
71,869,207
45,312
2,679,880
2,725,192
TAS
Available-for-sale securities
IBODI (Note 4)
86,075,104
1,995,257,875
2,081,332,979
—
—
—
783,415,804
10,467,349,868
11,250,765,672
1,447,037,352
4,926,835,337
6,373,872,689
P
= 6,605,702,345
P
= 19,610,111,917
P
= 26,215,814,262
P
= 14,607,913,752
P
= 7,095,548,848
P
= 21,703,462,600
431,490,058
Receivables from customers
(Note 5)
Other resources (Note 8):
Accrued interest receivable
393,927,264
248,462,928
642,390,192
431,002,058
488,000
5,812,626
380,700,186
386,512,812
43,883,573
190,397,899
234,281,472
150,652,367
100,481,598
251,133,965
142,887,039
27,671,416
170,558,455
292,562
51,200,000
51,492,562
61,202,466
—
61,202,466
P
= 11,108,540,996
P
= 32,887,008,495
P
= 43,995,559,491
P
= 19,223,171,867
P
= 12,243,621,380
P
= 31,466,793,247
Sales contract receivable
Accounts receivable
Other investments
2003
2004
Financial Liabilities
(As restated)
Due Within
Due Beyond
One Year
One Year
Total
Due Within
Due Beyond
One Year
One Year
Total
Deposit liabilities
Demand
P
= 2,071,542,212
P
=—
P
= 2,071,542,212
P
= 715,857,646
P
=—
P
= 715,857,646
Savings
24,247,860,215
—
24,247,860,215
20,716,617,281
—
20,716,617,281
Time
10,151,591,998
3,774,590,296
13,926,182,294
4,221,383,102
2,118,831,600
6,340,214,702
36,470,994,425
3,774,590,296
40,245,584,721
25,653,858,029
2,118,831,600
27,772,689,629
Bills payable (Note 11)
—
—
—
656,206,699
—
656,206,699
211,541,049
—
211,541,049
135,778,875
—
135,778,875
388,262,862
—
388,262,862
295,326,030
—
295,326,030
Accounts payable
300,239,138
—
300,239,138
368,484,827
8,214,873
376,699,700
Bills purchased — contra
137,067,612
—
137,067,612
88,854,894
—
88,854,894
Other credits
80,616,882
—
80,616,882
38,013,452
—
38,013,452
Dividends payable
37,655,191
—
37,655,191
180,996,947
—
180,996,947
Withholding taxes payable
35,888,285
—
35,888,285
25,709,341
—
25,709,341
P
= 37,662,265,444
P
= 3,774,590,296
P
= 41,436,855,740
P
= 27,443,229,094
P
= 2,127,046,473
P
= 29,570,275,567
Cashier’s and gift checks
Accrued taxes, interest and
other expenses
Other liabilities (Note 12):
14. Miscellaneous Income
This account consists of:
2004
Rent (Note 15)
Foreign exchange gain — net
Recovery from accounts written-off
Income from trust operations
Others
2003
2002
(As restated)
P
= 28,750,156
3,389,699
3,353,957
2,777,556
55,331,971
P
= 41,966,730
440,338
2,990,015
3,437,890
34,135,727
P
= 8,749,843
1,025,727
4,582,613
3,087,100
6,686,733
P
= 93,603,339
P
= 82,970,700
P
= 24,132,016
Miscellaneous income — others in 2004 include long outstanding accounts payable
which were recognized in income amounting to P
= 21.2 million.
F-24
15. Leases
The Bank leases the premises occupied by its branches for periods ranging from 1 to 20
years renewable under certain terms and conditions. Various lease contracts include
escalation clauses, most of which bear an annual rent increase of 10%. Rentals charged
against operations under these lease contracts amounting to P
= 151.2 million in 2004 and
P
= 118.1 million (as restated) in 2003 and P
= 105.3 million (as restated) in 2002 are shown
under Occupancy and Equipment-related Expenses in the statements of income.
Future minimum rentals payable under non-cancelable operating leases are as follows:
2004
Within one year
After one year but not more than five years
After more than five years
2003
P
= 155,315,801
450,445,351
299,329,676
P
= 152,421,782
520,486,658
384,604,170
P
= 905,090,828
P
= 1,057,512,610
The Bank entered into commercial property leases on its surplus office. These noncancelable leases have remaining non-cancelable lease terms of between 1 and 5 years.
As of December 31, 2004, there is no contingent rental income. Rent income of the Bank
related to these property leases amounted to P
= 24.8 million in 2004, P
= 38.6 million in 2003
and P
6.1
million
in
2002.
=
Future minimum rentals receivable under non-cancelable operating leases are as follows:
2004
Within one year
After one year but not more than five years
2003
P
= 2,471,969
902,888
P
= 3,644,987
3,227,875
P
= 3,374,857
P
= 6,872,862
16. Miscellaneous Expenses
This account consists of:
2004
Insurance
Information technology
Litigation
Communications
Advertising
Transportation and traveling
Management and professional fees
Repairs and maintenance
Commissions
Stationery and supplies
Fines, penalties and other charges
Supervision and examination fees
Rewards and incentives
Entertainment, amusement and
recreation (Note 17)
Membership fees and dues
Banking fees
Others
2003
2002
P
= 73,832,356
57,446,158
53,897,276
48,624,609
36,064,500
31,269,973
30,499,955
24,692,224
23,289,567
22,707,055
17,734,078
11,262,046
8,450,149
P
= 58,600,452
35,964,478
73,686,478
35,417,403
47,377,610
28,669,025
14,056,124
19,973,872
11,839,537
20,242,399
4,505,691
12,144,000
4,202,066
P
= 66,056,657
37,652,920
28,850,077
30,476,031
66,825,657
42,131,761
14,406,201
22,324,118
7,838,705
20,891,273
3,160,483
11,310,957
5,218,197
4,293,736
4,126,093
2,083,353
44,434,151
15,235,744
3,247,858
1,036,004
20,609,540
21,977,981
5,393,147
1,413,163
14,091,898
P
= 494,707,279
P
= 406,808,281
P
= 400,019,226
F-25
Insurance expense includes premiums paid to the Philippine Deposit Insurance
Corporation amounting to P
= 61.5 million in 2004, P
= 56.4 million in 2003 and P
= 43.9
million in 2002.
17. Income and Other Taxes
Under Philippine tax laws, the Bank is subject to percentage and other taxes (presented
as Taxes and Licenses in the statements of income) as well as income taxes. Percentage
and other taxes paid consist principally of gross receipts tax (GRT) and documentary
stamps taxes. Effective January 1, 2003, the Bank was subject to the value-added tax
instead of GRT. However, Republic Act No. 9238 reimposed GRT on the Bank effective
January 1, 2004.
Income taxes include corporate income tax, discussed below, and final tax paid at the
rate of 20%, which represents final withholding tax on gross interest income from
government securities, deposits, and other deposit substitutes.
Under current tax regulations, the corporate income tax rate is 32%. Interest allowed as
a deductible expense is reduced by an amount equivalent to 38% of interest income
subjected to final tax. An MCIT of 2% of modified gross income is computed and
compared with the regular income tax. Any excess of the MCIT over the regular income
tax is deferred and can be used as a tax credit against future income tax liability for the
next three years. In addition, the NOLCO is allowed as a deduction from taxable income
in the next three years from inception.
Provision for income tax consists of:
2003
2002
(As restated)
2004
Current:
Final tax
MCIT
P
= 65,222,797
22,596,674
P
= 39,069,947
19,582,859
Deferred
87,819,471
(126,029,660)
58,652,806
(112,360,092)
P
= (38,210,189)
P
= (53,707,286)
P
= 46,878,281
18,039,966
64,918,247
(47,303,582)
P
= 17,614,665
Recognized deferred tax assets consist of:
2004
Temporary differences on:
Allowance for probable losses
NOLCO
Accrued rent
Carryforward benefits of MCIT
F-26
2003
(As restated)
P
= 148,260,423
73,246,084
22,007,293
42,179,533
P
= 115,055,311
8,385,275
16,640,228
19,582,859
P
= 285,693,333
P
= 159,663,673
Unrecognized deferred tax assets consist of:
2003
(As restated)
2004
Temporary differences on:
Allowance for probable losses
Unamortized past service costs
NOLCO
Unrealized loss on foreclosures
Carryforward benefits of MCIT
P
= 243,744,396
33,744,904
24,661,808
1,155,872
18,039,966
P
= 238,291,507
34,374,596
25,312,156
1,231,812
18,039,966
P
= 321,346,946
P
= 317,250,037
Management believes that it is not probable that these temporary differences, unused tax
credits and tax losses will be realized in the future.
Details of the Bank’s NOLCO follow:
Inception Year
Amount
Expired
Balance
Expiry Year
2001
2002
2003
2004
P
= 2,032,338
77,068,149
26,203,985
202,690,028
P
= 2,032,338
—
—
—
P
=—
77,068,149
26,203,985
202,690,028
P
= 307,994,500
P
= 2,032,338
P
= 305,962,162
2004
2005
2006
2007
Details of the Bank’s MCIT follow:
Inception Year
Amount
Expired
Balance
Expiry Year
2001
2002
2003
2004
P
= 13,244,538
18,039,966
19,582,859
22,596,674
P
= 13,244,538
—
—
—
P
=—
18,039,966
19,582,859
22,596,674
P
= 73,464,037
P
= 13,244,538
P
= 60,219,499
2004
2005
2006
2007
The reconciliation between the statutory income tax rate and effective income tax rate
follows:
2004
2003
2002
(As restated)
Statutory income tax rate
Tax effect of:
Tax-paid and tax-exempt income
Expired NOLCO and MCIT
Nondeductible expense
Others
32.00%
32.00%
(49.55)
—
7.94
1.07
(40.07)
9.03
6.59
(20.41)
Effective income tax rate
(8.54%)
(12.86%)
32.00%
(43.79)
—
10.96
6.75
5.92%
Effective September 1, 2002, Revenue Regulations No. 10-2002 provides for the ceiling
on the amount of entertainment, amusement and recreational (EAR) expense that can be
claimed as a deduction against taxable income. Under the regulation, EAR expenses
allowed as a deductible expense is limited to the actual EAR paid or incurred but not to
exceed 1% of net revenue.
18. Trust Operations
Securities and other resources held by the Bank in fiduciary or agency capacity for its
customers are not included in the accompanying statements of condition since these are
not resources of the Bank (see Note 23).
F-27
In connection with the trust functions of the Bank, government securities with face value
of P
= 13.0 million and P
= 16.0 million as of December 31, 2004 and 2003, respectively, are
deposited with the BSP in compliance with trust regulations.
Additionally, 10% of the Bank’s net profit realized by the Bank from its trust operations is
appropriated to surplus reserve until such reserve for trust functions amounts to 20% of
the Bank’s regulatory capital.
19. Capital Funds
Details of the Bank’s dividend distribution follow:
Dividends
Date of declaration
November 19, 2001
January 27, 2003
November 25, 2003
August 24, 2004
December 31, 2004
Per
share
P
= 1.00
0.60
1.00
0.40
0.20
The determination of
based on the amount
to the BSP, which is
differ from Philippine
Total amount
P
= 179,501,520
107,700,912
179,501,520
71,800,608
35,900,304
Date of BSP
approval
Record date
Payment date
December 7, 2001
February 27, 2003
January 12, 2003
September 30, 2004
February 23, 2005
January 1, 2002
March 26, 2003
February 10, 2004
October 25, 2004
March 16, 2005
February 8, 2002
April 8, 2003
March 5, 2004
November 10, 2004
April 1, 2005
the Bank’s compliance with regulatory requirements and ratios is
of the Bank’s ��unimpaired capital’’ (regulatory networth) as reported
determined on the basis of regulatory accounting practices which
GAAP in some respects.
Under Section 9 of the Thrift Banks Act, the combined capital accounts of each bank
should not be less than an amount equal to ten percent (10%) of its risk assets. Risk
assets consist of total assets after exclusion of cash on hand, due from BSP, loans
covered by hold out or assignment of deposits, loans or acceptances under letters of
credit to the extent covered by margin deposits and other non-risk items as determined
by the MB.
Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio (CAR)
is to be inclusive of a market risk change. Using this formula, the CAR of the Bank was
12.46% and 13.30% as of December 31, 2004 and 2003, respectively.
20. Earnings Per Share (EPS)
The following table presents information used to calculate basic EPS:
2004
a.
b.
c.
Net income
Weighted average number of
common shares
EPS (a/b)
2003
2002
(As restated)
P
= 485,553,081
P
= 471,246,890
P
= 279,731,828
179,501,520
P
= 2.71
179,501,520
P
= 2.63
179,501,520
P
= 1.56
As of December 31, 2004, 2003 and 2002, there were no shares of stock with dilutive
effect on the basic EPS of the Bank.
21. Related Party Transactions
In the ordinary course of business, the Bank has loans and other transactions with its
affiliates, and with certain directors, officers, stockholders and related interests (DOSRI).
Under the Bank’s policy, these loans and other transactions are made substantially on
the same terms as with other individuals and businesses of comparable risks. The
General Banking Law limits the amount of direct credit accommodations to DOSRI, 70%
of which must be secured and should not exceed the total of their respective deposits
F-28
and book value of their respective investments in the Bank. In the aggregate, loans to
DOSRI generally should not exceed the lower of the Bank’s total capital funds or 15% of
the Bank’s total loan portfolio.
BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
The following table shows information relating to the loans, other credit accommodations
and guarantees classified as DOSRI accounts under regulations existing prior to said
circular and new DOSRI loans, other credit accommodations granted under said circular
as of December 31, 2004 and 2003 :
2004
Total outstanding DOSRI accounts
Percent of DOSRI accounts granted under
regulations existing prior to BSP Circular
No. 423 to total loans
Percent of new DOSRI accounts granted
under BSP Circular No. 423 to total loans
Percent of unsecured DOSRI accounts to total
DOSRI accounts
Percent of past due DOSRI accounts to total
DOSRI accounts
Percent of nonperforming DOSRI accounts to
total DOSRI accounts
2003
P
= 1,713,257,285
P
= 1,966,205,048
6.49%
9.06%
—
—
25.34%
27.83%
—
—
—
—
As of December 31, 2004, the Bank has no loans, other credit accommodations and
guarantees, as well as availments of previously approved loans and committed credit
lines not considered DOSRI accounts prior to the issuance of said circular but are
allowed a transition period of two years from the effectivity of the said circular until said
circular or said loan, other credit accommodations and guarantees become past due, or
are extended, renewed or restructured, whichever comes later.
Total interest income to these DOSRI loans amounted to P
= 202.8 million, P
= 204.4 million
and P
264.3
million
in
2004,
2003
and
2002,
respectively.
=
Other significant transactions and outstanding balances of the Bank with Metrobank and
its affiliates follow:
2004
Statement of condition accounts:
Due from other banks — Metrobank
Interbank loans receivable — Metrobank
Accounts receivable — Metrobank (Note 8)
Deposit liabilities
Bills payable — First Metro Investment
Corporation
Statement of income accounts:
Interest income on due from other banks
and interbank loans receivable
Interest expense on deposit liabilities
Interest expense on bills payable
2003
P
= 792,569,919
200,000,000
—
85,779,597
P
= 783,639,782
—
6,754,120
303,807,426
—
450,000,000
46,479,135
1,111,094
8,779,781
22,566,986
3,655,912
8,155,778
The total assets of retirement fund of employees amounting to P
= 97.1 million and P
= 80.5
million as of December 31, 2004 and 2003, respectively, is being managed by the Bank’s
trust department.
F-29
22. Retirement Plan
The Bank has a funded, noncontributory defined benefit plan covering substantially all of
its employees. The benefits are based on years of service and final compensation. Total
retirement expense which amounted to P
= 60.0 million in 2004 and 2003, and P
= 88.1 million
in 2002, is included under Compensation and Fringe Benefits in the statements of
income. Retirement expense in 2002 included retirement expense under the Bank’s early
retirement program.
Based on the actuarial valuation report dated October 31, 2004, the fair value of the plan
assets amounted to P
= 95.6 million. The unfunded actuarial liability of P
= 79.2 million as of
that date is amortized over the estimated average remaining working life of the
employees. Other principal actuarial assumptions used to determine retirement benefits
in such actuarial valuation were an investment earning rate of 10% per annum (p.a.), and
salary increase of 10%, both compounded annually. The Bank’s annual contribution
consists of payment covering the current service cost, interest on the unfunded actuarial
accrued liability and the annual amortization of the unfunded accrued liability less the
amortization of the actuarial gain (or loss) on the plan assets. Actuarial valuations are
made at least every two years.
23. Commitments and Contingent Liabilities
In the normal course of the Bank’s operations, there are various outstanding
commitments and contingent liabilities such as guarantees and commitments to extend
credit, which are not reflected in the accompanying financial statements. The Bank does
not anticipate significant losses as a result of these transactions.
The following is a summary of the Bank’s commitments and contingent liabilities at their
equivalent peso contractual amounts:
2004
Trust department accounts (see Note 18)
Late deposits/payments received
Items held for safekeeping
Outward bills for collection
Others
2003
P
= 579,772,207
100,987,844
1,219,625
474,768
1,843
P
= 497,701,131
19,058,469
55,745
945,164
24,471
In addition, the Bank has received tax assessments from the Bureau of Internal Revenue
on two banking industry issues. Management and tax counsels believe that they have a
valid defense against such claims. Accordingly, no provision for probable losses has
been provided.
Several suits and claims relating to the Bank’s lending operations and labor-related
cases remain unsettled. In the opinion of management, these suits and claims, if decided
adversely, will not involve sums having a material effect on the financial statements.
24. Financial Performance
The following basic ratios measure the financial performance of the Bank:
2003
(As restated
— Note 2)
2004
Return on average equity
Return on average assets
Net interest margin on average earning assets
F-30
11.85%
1.19
5.57
11.20%
1.47
5.84
25. Notes to Statements of Cash Flows
The following is a summary of non-cash activities:
2004
Non-cash investing activity:
Additions to ROPOA in settlement
of loans
P
= 2,951,646
2003
P
= 9,147,889
2002
P
= 139,065,917
26. Approval for the Release of the Financial Statements
The accompanying financial statements of the Bank were authorized for issue by the
Bank’s board of directors on March 15, 2005.
F-31
PHILIPPINE SAVINGS BANK
UNAUDITED STATEMENTS OF CONDITION
September 30
2005
RESOURCES
Cash and Other Cash Items (Note 10)
Due from Bangko Sentral ng Pilipinas
(Notes 10 and 12)
Due from Other Banks (Notes 12 and 20)
Interbank Loans Receivable (Notes 12 and 20)
Trading Account Securities, at market
(Notes 4 and 12)
Available for Sale Securities, at market
(Notes 4, 10 and 12)
Investment in Bonds and Other Debt Instruments
— net (Notes 4, 10, 12 and 17)
Receivables from Customers — net (Notes 5, 12
and 20)
Bank Premises, Furniture and Equipment — net
(Note 6)
Real and Other Properties Owned or Acquired
— net (Note 7)
Deferred Tax Assets (Note 16)
Other Resources — net (Note 8)
LIABILITIES AND CAPITAL FUNDS
Liabilities
Deposit Liabilities (Notes 10, 12 and 20)
Demand
Savings
Time
Cashier’s and Gift Checks (Note 12)
Accrued Taxes, Interest and Other Expenses
(Note 12)
Other Liabilities (Note 11)
Capital Funds
Common stock
Capital paid in excess of par value
Surplus reserves
Surplus
Unrealized gain on available-for-sale securities
(Note 4)
P
= 467,117,281
P
= 432,396,699
1,774,617,226
881,213,884
550,000,000
1,057,645,384
1,792,427,729
585,000,000
127,302,027
79,132,607
13,164,869,943
—
4,060,661,601
11,348,095,859
26,799,876,607
22,927,211,515
1,780,966,145
1,520,643,095
1,775,978,723
384,140,785
1,469,457,874
1,694,635,111
202,090,099
1,188,962,028
P
= 53,236,202,096
P
= 42,828,240,126
P
= 5,468,625,707
10,221,021,535
31,117,573,691
P
= 1,589,778,881
21,961,828,256
13,833,052,644
46,807,220,933
214,856,674
37,384,659,781
206,385,088
460,704,991
738,478,339
330,009,940
710,179,827
48,221,260,937
38,631,234,636
1,795,015,200
693,554,524
388,107,135
1,740,906,693
1,795,015,200
693,554,524
339,556,076
1,368,879,690
397,357,607
—
5,014,941,159
4,197,005,490
P
= 53,236,202,096
P
= 42,828,240,126
See accompanying Notes to Unaudited Financial Statements.
F-32
2004
PHILIPPINE SAVINGS BANK
UNAUDITED STATEMENTS OF INCOME
Nine Months Ended September 30
2005
2004
P
= 2,502,906,523
986,085,391
37,477,014
108,434,149
P
= 2,007,257,710
578,944,766
34,428,852
27,982,467
3,634,903,077
2,648,613,795
1,601,651,812
424,247
1,234,073,867
7,942,700
1,602,076,059
1,242,016,567
NET INTEREST INCOME BEFORE PROVISION
FOR PROBABLE LOSSES
PROVISION FOR PROBABLE LOSSES (Note 9)
2,032,827,018
275,000,000
1,406,597,228
41,000,000
NET INTEREST INCOME AFTER PROVISION FOR
PROBABLE LOSSES
1,757,827,018
1,365,597,228
294,185,633
52,791,903
140,931,866
47,536,522
275,845,715
68,577,266
63,377,376
72,704,741
535,445,924
480,505,098
666,239,411
227,499,342
592,257,509
162,566,927
191,152,215
134,670,479
87,372,068
32,188,091
531,935,193
148,216,412
93,057,298
82,891,033
39,825,489
404,034,787
1,871,056,799
1,522,849,455
422,216,143
323,252,871
INTEREST INCOME ON
Receivables from customers (Note 20)
Investment securities
Deposits with other banks (Note 20)
Interbank loans receivable (Note 20)
INTEREST EXPENSE ON
Deposit liabilities (Note 20)
Bills payable (Note 20)
OTHER INCOME
Service charges, penalties, fees and commissions
Profit from assets sold (Note 7)
Trading and securities gain — net (Note 4)
Miscellaneous (Note 13)
OTHER EXPENSES
Compensation and fringe benefits (Note 21)
Taxes and licenses (Note 16)
Occupancy and equipment-related expenses
(Note 14)
Depreciation and amortization (Note 6)
Security, messengerial and janitorial services
Amortization of intangible assets (Note 8)
Miscellaneous (Note 15)
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM) INCOME TAX
(Note 16)
NET INCOME
(5,568,933)
P
= 304,822,003
P
= 2.38
P
= 1.70
Earnings per share (Note 19)
See accompanying Notes to Unaudited Financial Statements.
F-33
18,430,868
P
= 427,785,076
PHILIPPINE SAVINGS BANK
UNAUDITED STATEMENTS OF CHANGES IN CAPITAL FUNDS
Nine Months Ended September 30
COMMON STOCK — P
= 10 par value
Authorized — 425,000,000 shares
Issued — 179,501,520 shares
CAPITAL PAID IN EXCESS OF PAR VALUE
2005
2004
P
= 1,795,015,200
693,554,524
P
= 1,795,015,200
693,554,524
SURPLUS RESERVES
Balance at beginning of year
Transfer from surplus (Note 17)
388,111,384
(4,249)
339,556,076
—
Balance at end of year
388,107,135
339,556,076
1,393,354,548
1,416,638,208
SURPLUS
Balance at beginning of year, as previously reported
Effect of adoption of new standards on accounting for:
Income tax
Leases
—
—
(317,220,037)
(35,360,484)
Balance at beginning of year, as restated
Net income
Transfer to surplus reserves (Note 17)
Cash dividends (Note 18)
Other Adjustment
1,393,354,548
427,785,076
4,249
(80,775,684)
538,504
1,064,057,687
304,822,003
Balance at end of year
1,740,906,693
1,368,879,690
UNREALIZED GAIN/ (LOSS) ON AVAILABLE-FORSALE SECURITIES (Note 4)
Balance at beginning of year
Unrealized loss during the year
—
397,357,607
—
—
Balance at end of year
397,357,607
—
P
= 5,014,941,159
P
= 4,197,005,490
See accompanying Notes to Unaudited Financial Statements.
F-34
—
—
PHILIPPINE SAVINGS BANK
UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments to reconcile income before income tax to
net cash generated from operations:
Depreciation and amortization (Note 6)
Provision for probable losses (Note 9)
Profit from assets sold (Note 7)
Amortization of intangible assets (Note 8)
Unrealized trading loss on trading account
securities (Note 4)
Changes in operating resources and liabilities:
Increase in amounts of:
Trading account securities
Receivables from customers
Other resources
Increase in amounts of:
Deposit liabilities
Cashier’s and gift checks
Accrued taxes and other expenses
Other liabilities
2005
2004
P
= 422,216,143
P
= 323,252,871
134,670,479
275,000,000
(52,791,903)
32,188,091
93,419
93,057,298
41,000,000
(68,577,266)
39,825,489
2,332
(55,526,239)
(3,414,386,326)
(75,001,003)
(76,407,415)
(3,275,274,792)
(138,515,678)
6,561,636,212
3,315,625
85,106,490
54,514,217
9,611,970,153
70,606,212
34,446,622
37,039,146
Net cash generated from operations
Income taxes paid
3,971,035,205
(87,192,849)
6,692,424,972
(43,522,881)
Net cash provided by operating activities
3,883,842,356
6,648,902,091
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities
Purchases of investments in bonds and other debt
instruments
Net acquisitions of bank premises, furniture and
equipment (Note 6)
(10,667,578,459)
7,127,957,213
—
(5,069,833,721)
(377,797,253)
(125,396,479)
(3,917,418,499)
(5,195,230,200)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (Note 18)
Net payment of bills payable
(88,121,923)
—
(178,736,291)
(656,206,699)
Net cash used in financing activities
(88,121,923)
(834,942,990)
Net cash used in investing activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(Forward)
F-35
(121,698,066)
618,728,901
Nine Months Ended September 30
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
Cash and other cash items
Due from Bangko Sentral ng Pilipinas
Due from other banks
Interbank loans receivable
CASH AND CASH EQUIVALENTS AT END OF YEAR
Cash and other cash items
Due from Bangko Sentral ng Pilipinas
Due from other banks
Interbank loans receivable
2005
2004
P
= 750,408,617
1,958,275,032
885,962,808
200,000,000
P
= 759,540,596
1,651,912,913
837,287,402
—
3,794,646,457
3,248,740,911
467,117,281
1,774,617,226
881,213,884
550,000,000
432,396,699
1,057,645,384
1,792,427,729
585,000,000
P
= 3,672,948,391
3,867,469,812
See accompanying Notes to Unaudited Financial Statements.
F-36
PHILIPPINE SAVINGS BANK
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1.
Corporate Information
Philippine Savings Bank (the Bank) was incorporated in the Philippines on June 30, 1959
primarily to engage in savings and mortgage banking. The Bank’s shares are listed in the
Philippine Stock Exchange. The Bank offers a wide range of products and services such
as deposit products, loans, treasury and trust functions that cater mainly to the retail and
consumer market. On September 6, 1991, the Bank was authorized to perform trust
functions. As of September 30, 2005 and 2004, the Bank had 150 and 122 branches,
respectively, and 1,725 and 1,561 employees, respectively.
As of September 30, 2005, the Bank is seventy-four percent (74%) owned by
Metropolitan Bank & Trust Company (Metrobank).
The Bank’s principal place of business is located at PSBank Center, 777 Paseo de
Roxas corner Sedeno St., Makati City.
2.
Summary of Significant Accounting Policies
Basis of Financial Statement Preparation
The Bank’s financial statements have been prepared in accordance with the accounting
principles generally accepted in the Philippines (Philippine GAAP) for the banking
industry in effect as of December 31, 2004. The financial statements are prepared under
the historical cost convention as modified for the measurement at fair value of derivatives
and investment securities other than Investments in Bonds and Other Debt Instruments
(IBODI). The accompanying financial statements of the Bank reflect the accounts
maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit
(FCDU). The financial statements individually prepared for these units are combined and
inter-unit accounts are eliminated.
The books of accounts of the RBU are maintained in Philippine pesos, while those of
FCDU are maintained in their original currencies. For financial reporting purposes, FCDU
accounts and foreign-currency denominated accounts in RBU are translated into their
equivalents in Philippine pesos based on the Philippine Dealing System weighted
average rate (PDSWAR) prevailing at the end of the year (for resources and liabilities)
and at the average PDSWAR for the year (for income and expenses). Foreign exchange
differentials arising from foreign currency transactions and restatements of foreign
currency denominated resources and liabilities, except for past due receivables and
nonmonetary assets, are credited to or charged against operations in the year in which
the rates change.
The preparation of the financial statements in accordance with Philippine GAAP requires
the Bank to make estimates and assumptions that affect the reported amounts of
resources, liabilities, income and expenses and disclosure of contingent resources and
contingent liabilities. Future events may occur which will cause the assumptions used in
arriving at the estimates to change. The effects of any change in estimates are reflected
in the financial statements as they become reasonably determinable. Operating results
for the nine months ended September 30, 2005 are not necessarily indicative of the
results that may be expected for the full fiscal year.
F-37
Changes in Accounting Policies
New accounting standards based on International Accounting Standards and
International Financial Reporting Standards referred to as Philippine Financial
Reporting Standards (PFRS), respectively, became effective on January 1, 2005. The
Bank will adopt the following new accounting standards that are relevant to its operations
beginning with its annual audited financial statements for the year ending December 31,
2005 :
.
PAS 19, Employee Benefits, provides for the accounting for long-term and other
employee benefits. The standard requires the projected unit credit method in
determining the retirement benefits of the employees and a change in the manner of
computing benefit expense relating to past service cost and actuarial gains and
losses. It requires the Bank to determine the present value of defined benefit
obligations and the fair value of any plan assets with sufficient regularity that the
amounts recognized in the financial statements do not differ materially from the
amounts that would be determined at the statement of condition date.
Upon adoption of the standard, the difference between the present value of the
obligation and the fair value of the plan assets will be included in the statements of
condition and will be charged against surplus.
.
PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the
capitalization of foreign exchange losses. The standard also addresses the
accounting for transactions in foreign currency and translating the financial
statements of foreign operations that are included in those of the reporting
enterprise by consolidation, proportionate consolidation and equity method. The
adoption of this standard will have no material impact on the financial statements.
.
PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial
Institutions, provides for the required disclosure and presentation in respect of the
accounts of banks and similar financial institutions. It also provides that provision
for general banking risks is treated as an appropriation of surplus and should not be
included in the determination of net income for the period. The Bank is in the
process of determining the effect of this standard in the context of the need to
reallocate the general reserve to cover any increase in specific loan reserves
required under PAS 39 (see discussion on PAS 39 below).
.
PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure
and presentation of all financial instruments. The standard requires more
comprehensive disclosures about the Bank’s financial instruments, whether
recognized or unrecognized in the financial statements. New disclosure
requirements include terms and conditions of financial instruments used by the
Bank, types of risks associated with both recognized and unrecognized financial
instruments (market risk, price risk, credit risk, liquidity risk, and cash flow risk), fair
value information of both recognized and unrecognized financial assets and
financial liabilities, and the Bank’s financial risk management policies and
objectives. The standard also requires financial instruments to be classified as
liabilities or equity in accordance with its substance and not its legal form.
.
PAS 39, Financial Instruments: Recognition and Measurement, establishes the
accounting and reporting standards for recognizing and measuring information about
the Bank’s financial assets and financial liabilities. The standard requires a financial
asset or financial liability to be recognized initially at fair value. Subsequent to initial
recognition, the Bank should continue to measure financial assets at their fair
values, except for loans and receivables and held-to-maturity investments, which
are measured at cost or amortized cost using the effective interest rate method.
Financial liabilities are subsequently measured at cost or amortized cost, except for
liabilities classified as ��at fair value through profit and loss’’ and derivatives, which
are subsequently measured at fair value.
F-38
PAS 39 also covers the accounting for derivative instruments. The standard has
expanded the definition of a derivative instrument to include derivatives (derivativelike provisions) embedded in non-derivative contracts. Under the standard, every
derivative instrument is recorded in the statement of condition as either an asset or
liability measured at its fair value. Derivatives that are not hedged are adjusted to
fair value through income. If a derivative is designated and qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are
either offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in capital funds until the hedged item
is recognized in income. The Bank must formally document, designate, and assess
the effectiveness of derivative transactions that receive hedge accounting treatment.
The Bank has established a working committee that handles and monitors the
implementation of the new and revised accounting standards, particularly PAS 32
and PAS 39. The implementation plan covers the following activities:
1.
Review of all contracts and agreements outstanding as of January 1, 2005 and
beyond with the aim of identifying any embedded derivatives for bifurcation and
valuation;
2.
Evaluation of the financial risks exposures relative to the adoption of the
standards and formulation of appropriate risk management strategies;
3.
Classification and measurement of financial assets and financial liabilities;
4.
Review of PAS 39 implications on non-derivative financial assets and liabilities;
and
5.
Enhancement of existing processes and systems relating to valuation of
financial instruments.
The working committee has substantially completed the foregoing implementation
activities and is now quantifying the financial impact of the adoption of PAS 39.
The Bangko Sentral ng Pilipinas (BSP), through its Monetary Board (MB) Resolution
No. 1869 dated December 23, 2004, has given the banks and financial institutions
until December 31, 2005 to set up their infrastructures to be PAS 32 and 39
compliant. The Philippine Securities and Exchange Commission (SEC), through an
advisory letter dated June 3, 2005, issued guidelines for the transition to PAS 39 of
regulated companies. Interim reports that are required to be submitted to the BSP
and SEC for 2005 need not be in compliance with the provisions of the said
standards.
With respect to account classification and related measurement, the Bank has
already submitted to the BSP the reclassification of its trading and investment
securities portfolio. The Bank does not expect any further material impact on the
classification of financial assets and liabilities.
The Bank is currently adopting the effective interest rate method in amortizing
unearned discount related to loans. Therefore, the effect of the adoption of PAS 39
in so far as the amortization of unearned discount on loans is concerned will not be
material. With regard to the adoption of effective interest rate method in measuring
amortized cost for IBODI and Available-for-sale securities (ASS), the effect has not
yet been quantified since the existing systems of the Bank have not yet been
reconfigured to adopt the effective interest rate method of amortization. Due to the
volume of transactions, it is impracticable to compute for the financial impact
manually. The Bank will report the financial implications as soon as the information
becomes available.
F-39
PAS 39 requires that in the absence of quoted market rates, the discounted cash
flow method will be used in determining whether an asset is impaired. The Bank will
adopt the net flow rate method for consumer loans and discounted cashflows
method for corporate accounts in determining asset impairment. The effect of
adopting this provision will be material for impaired loans and other receivables.
Currently, the adequacy of allowance for probable losses on loans and other
receivables is determined based on management criteria and BSP requirements.
The existing systems of the Bank have not yet been programmed to adopt the
discounted cash flow method. Due to the volume of transactions, it is impracticable
to compute for the financial impact manually. The Bank will report the financial
implications as soon as the information becomes available.
As allowed by the SEC, the effect of adopting PAS 32 and PAS 39 will not result in
a restatement of prior years’ financial statements. Any cumulative effect of adopting
these standards, however, will be charged against surplus as of January 1, 2005.
The disclosures required by these standards will be reflected in the 2005 annual
audited financial statements, where applicable.
.
PAS 40, Investment Property, prescribes the accounting treatment for investment
property and related disclosure requirements. This standard permits the Bank to
choose either the fair value model or cost model in accounting for investment
property. Fair value model requires an investment property to be measured at fair
value with fair value changes recognized directly in the statements of income. Cost
model requires that an investment property should be measured at depreciated cost
less any accumulated impairment losses. The Bank is still in the process of
identifying real and other properties owned or acquired (ROPOA) that will be
accounted for under PAS 40 and PFRS 5 (see significant provisions of PFRS 5
below), and account for these assets using the cost model under PAS 40. The
adoption of PAS 40 may result in a material adjustment of prior year’s financial
statements. The Bank has not yet fully quantified the implications of PAS 40 since
the system that will support the accounting for ROPOA under PAS 40 has not yet
been established. Due to the volume of transactions, it is impracticable to compute
for the financial impact manually. The Bank will report the financial implications of
PAS 40 as soon as the information becomes available.
.
PFRS 2, Share-Based Payments, will result in a charge to net income for the cost of
share options granted. Currently, the Bank has no transaction involving share-based
payments but will comply with the requirements of this standard in respect of future
transactions.
.
PFRS 3, Business Combination, which will result in the cessation of the amortization
of goodwill and a requirement for an annual test for goodwill impairment. Any
resulting negative goodwill after performing reassessment will be credited to
income. Moreover, pooling of interests in accounting for business combination will
no longer be permitted. The effect of adopting this standard will not result in
retroactive adjustment of priors’ financial statements but will affect prospective
financial statements as a result of non-amortization of goodwill.
.
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies
the accounting for assets held for sale and the presentation and disclosure of
discontinued operations. It requires assets that meet the criteria to be classified as
held for sale to be measured at the lower of carrying amount and fair value less
costs to sell, and the depreciation on such assets to cease. Furthermore, assets
that meet the criteria to be classified as held-for-sale should be presented
separately on the face of the statements of condition and the results of
discontinued operations to be presented separately in the statements of income.
Pending the identification of the ROPOA to be accounted for under PFRS 5, as
discussed under PAS 40 above, the effect of adoption of PFRS 5 with respect to the
assets to be accounted for under this standard will not be material to the financial
statements.
F-40
The Bank will also adopt the following revised standards:
.
PAS 1, Presentation of Financial Statements, provides a framework within which an
entity assesses how to present fairly the effects of transactions and other events;
provides the base criteria for classifying liabilities as current or noncurrent; prohibits
the presentation of income from operating activities and extraordinary items as
separate line items in the statements of income; and specifies the disclosures about
key sources of estimation uncertainty and judgments that management has made in
the process of applying the entity’s accounting policies. It also requires changes in
the presentation of minority interest in the statements of condition and statements of
income.
.
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes
the concept of fundamental error and the allowed alternative to retrospective
application of voluntary changes in accounting policies and retrospective
restatement to correct prior period errors. It defines material omission or
misstatements, and describes how to apply the concept of materiality when
applying accounting policies and correcting errors.
.
PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the statement of condition date.
.
PAS 16, Property, Plant and Equipment, provides additional guidance
clarification on recognition and measurement of items of property, plant
equipment. It also provides that each part of an item of property, plant
equipment with a cost that is significant in relation to the total cost of the item
be depreciated separately.
.
PAS 17, Leases, provides a limited revision to clarify the classification of a lease of
land and buildings and prohibits expensing of initial direct costs in the financial
statements of lessors.
.
PAS 24, Related Party Disclosures, provides additional guidance and clarity in the
scope of the standard, the definitions and the disclosures for related parties. It also
requires disclosure of the compensation of key management personnel by benefit
type.
.
PAS 33, Earnings Per Share, prescribes principles for the determination and
presentation of earnings per share for entities with publicly traded shares, entities in
the process of issuing ordinary shares to the public, and any entities that calculate
and disclose earnings per share. The standard also provides additional guidance in
computing earnings per share including the effects of mandatorily convertible
instruments and contingently issuable shares, among others.
.
PAS 36, Impairment of Assets, establishes frequency of impairment testing for
certain intangibles and provides additional guidance on the measurement of an
asset’s value in use.
.
PAS 38, Intangible Assets, provides additional clarification on the definition and
recognition of certain intangibles. Moreover, this revised accounting standard
requires that an intangible asset with an indefinite useful life should not be
amortized but will be tested for impairment by comparing its recoverable amount
with its carrying amount annually and whenever there is an indication that the
intangible asset may be impaired.
and
and
and
shall
The Bank does not expect significant changes in the accounting policies when it adopts
the applicable revised standards. Additional disclosures required by the applicable
revised standards will be included, where applicable.
F-41
Cash and Cash Equivalents
Cash and cash equivalents include cash and other cash items, amounts due from BSP
and other banks and interbank loans receivable that are convertible to known amount of
cash with original maturities of three months or less from dates of placements and that
are subject to insignificant risk of changes in value.
Trading Account Securities (TAS)
TAS, which consist of government and private debt securities, are purchased and held
principally with the intention of selling them in the near term and are carried at fair
market value. Realized and unrealized gains and losses on these instruments are
recognized in Trading and Securities Gain — Net in the statements of income. Quoted
market prices, when available, are used to determine the fair value of trading
instruments. If quoted market prices are not available, fair market value is determined
using the discounted cash flows or using quoted prices of instruments with similar
characteristics.
When a security is transferred to TAS, the unrealized holding gain or loss at the date of
transfer is recognized in the statements of income immediately.
Available-for-Sale Securities
Securities are classified as ASS when purchased and held indefinitely, i.e., neither held
to maturity nor for trading purposes, where the Bank anticipates to sell in response to
liquidity requirements or in anticipation of changes in interest rates or other factors. ASS
is carried at fair market value and any unrealized gains or losses are reported as a
separate component of capital funds unless unrealized losses represent impairment
losses in which case such amounts are charged against income.
For a debt security transferred into ASS from IBODI, the unrealized holding gain or loss
at the date of the transfer shall be excluded from reported earnings and reported as a
separate component of capital funds until realized.
Investments in Bonds and Other Debt Instruments
IBODI are government and private debt securities where the Bank has the positive intent
and ability to hold to maturity and are carried at amortized cost on a straight-line basis.
An allowance is set up for any substantial and presumably permanent decline in the
aggregate carrying value of the investments. Under current BSP regulations, IBODI shall
not exceed 50% of adjusted statutory net worth plus 40% of total deposit liabilities.
Receivables from Customers and Allowance for Probable Losses
Receivables from customers are stated at the outstanding principal balance reduced by
unearned discounts and allowance for probable losses. Under current BSP regulations,
nonaccruing receivables are those that have been defined as past due and items under
litigation, or those for which, in the opinion of management, collection of interest or
principal is doubtful. Receivables are not reclassified as accruing until interest and
principal payments are brought current or the receivables are restructured in accordance
with existing BSP regulations, and future payments appear assured.
The allowance for probable losses on loans, which includes both specific and general
loan loss reserves, represents management’s estimate of probable losses inherent in the
portfolio, after consideration of prevailing and anticipated economic conditions, prior loss
experience, estimated recoverable values based on fair market values of underlying
collateral, prospects of supports from any financially responsible guarantor, subsequent
collections including, as appropriate, estimated cash flows and on evaluations made by
the BSP. The BSP observes certain criteria and guidelines based largely on the
classification of loans in establishing specific loan loss reserves.
F-42
Allowance on other risk assets is maintained at a level considered adequate to provide
for potential uncollectibility of other risk assets. Management evaluates the level of this
allowance based on the factors that affect the collectibility of the accounts. A review of
age and status of these accounts, designed to identify accounts to be provided with
allowance, is made by the management on a continuing basis.
The allowance for probable losses is established through provisions for probable losses
charged to current operations. Receivables are written off against the allowance for
probable losses when management believes that the collectibility of the principal is
unlikely.
As discussed in the changes in accounting policies, under PAS 39, the discounted cash
flow method generally will be used in determining impairment provisions on loans.
Moreover, as provided under PAS 30, general loan loss provisions will no longer be
included in the determination of net income for the period.
Bank Premises, Furniture and Equipment
Bank premises, furniture and equipment are stated at cost less accumulated depreciation
(except for leasehold improvements which is carried net of amortization) and any
impairment in value. The initial cost of bank premises, furniture and equipment consists
of its purchase price, including taxes and any directly attributable costs of bringing the
asset to its working condition and location for its intended use. Expenditures incurred
after the bank premises, furniture and equipment have been put into operation, such as
repairs and maintenance are normally charged against operations in the year in which
the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be
obtained from the use of an item of bank premises, furniture and equipment beyond its
originally assessed standard of performance, the expenditures are capitalized as
additional cost of bank premises, furniture and equipment. When assets are retired or
otherwise disposed of, the cost, and the related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss is reflected
as income or loss in the statements of income.
Depreciation is determined using the straight-line method over the estimated useful life of
the respective assets. Leasehold improvements are amortized over the shorter of the
estimated average useful life of the improvements of five years or the terms of the
related leases.
The annual depreciation rates follow:
Building
Furniture, fixtures and equipment
Leasehold improvements
4%
20%
20% or the term of the lease, whichever is shorter
The useful life and the depreciation and amortization method are reviewed periodically to
ensure that the period and the method of depreciation and amortization are consistent
with the expected pattern of economic benefits from items of bank premises, furniture
and equipment.
The carrying values of bank premises, furniture and equipment are reviewed for
impairment when events or changes in circumstances indicate that the carrying values
may not be recoverable. If any such indication exists and where the carrying values
exceed the estimated recoverable amounts, an impairment loss is recognized in the
statements of income (see accounting policy on Impairment of Assets).
F-43
Impairment of Assets
An assessment is made at each statement of condition date if there is any indication of
impairment of any asset, or if there is any indication that an impairment loss previously
recognized for an asset in prior years may no longer exist or may have decreased. If any
such indication exists, the asset’s recoverable amount is estimated at the higher of the
asset’s value in use or its net selling price.
An impairment loss is recognized by a charge against current operations for the excess
of the carrying amount of an asset over its recoverable amount. An impairment loss is
charged to operations in the year in which it arises.
A previously recognized impairment loss is reversed by a credit to current operations to
the extent that it does not restate the asset to a carrying amount in excess of what would
have been determine (net of any accumulated depreciation) had no impairment loss been
recognized for the asset in prior years.
Real and Other Properties Owned or Acquired
Resources acquired in settlement receivables are stated at the total outstanding
exposure at the time of acquisition or bid price, whichever is lower, less allowance for
probable losses and impairment in value, if any. Nonrefundable taxes such as capital
gains tax and documentary stamp tax which were paid by the Bank are capitalized,
provided that the adjusted value of the foreclosed asset does not exceed net realizable
value. Security, maintenance and other foreclosure-related expenses are charged to
operations as incurred. Allowance for probable losses is set up based on BSP
provisioning requirements and for any anticipated significant shortfalls from the
recorded values based on appraisal reports and current negotiations and programs to
dispose of these properties to other interested parties.
As discussed in the changes in accounting policies, acquired assets should be carried at
depreciated cost and any unnecessary impairment loss reserves should be reversed
upon adoption of PAS 40 by December 31, 2005.
Intangible Assets
Intangible assets include goodwill, software costs and license fees. Intangible assets
acquired separately from a business are capitalized at cost. Intangible assets acquired
as part of an acquisition of a business are capitalized separately from goodwill if the fair
value can be measured reliably on initial recognition, subject to the constraint that,
unless the asset has a readily ascertainable market value, the fair value is limited to an
amount that does not create or increase any negative goodwill arising on the acquisition.
Software costs and license fees are being amortized over a period of five years on a
straight-line basis.
Intangible assets are carried net of amortization and any impairment in value. Goodwill
which arises from the purchase of branch offices from the Parent Company is being
amortized over a period of five years from the date of purchase. As discussed in the
changes in accounting policies, goodwill will no longer be amortized but will be subject to
an annual test for impairment. Goodwill amortizations recognized since January 1, 2005
will be reversed upon adoption of the new standard by December 31, 2005.
The carrying values of intangible assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Income Taxes
Deferred income tax is provided, using the balance sheet liability method, on all
temporary differences at the statement of condition date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences.
Deferred income tax assets are recognized for all deductible temporary differences,
carryforward of unused tax credits from excess minimum corporate income tax (MCIT)
F-44
over the regular corporate income tax and unused net operating loss carryover (NOLCO),
to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences and carryforward of unused MCIT and unused NOLCO
can be utilized. Deferred income tax, however, is not recognized when it arises from the
initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor
taxable profit or loss.
The carrying amount of deferred income tax assets is reviewed at each statement of
condition date and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred income tax asset to be
utilized.
Deferred income tax assets and liabilities are measured at the tax rates that are
applicable to the year when the asset is realized or the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the statement of
condition date.
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will
flow to the Bank and the revenue can be reliably measured. The following specific
recognition criteria must also be met before revenue is recognized:
Interest Income
Unearned discount is recognized as income over the terms of the receivables using the
effective interest rate method.
Interest income on nondiscounted receivables is recognized based on the accrual
method of accounting, except in the case of nonaccruing receivables. Interest income on
nonaccruing receivables are recognized only to the extent of the cash collections
received.
Interest on interest-bearing placements and securities are recognized as the interest
accrues, taking into account the effective yield on the asset. Under the new standards,
interest will be recognized on impaired loans as loss provisions are made by way of
discounting estimated cash flow recoveries from such impaired loans.
Loan Fees and Service Charges
Loan commitment fees are recognized as earned over the terms of the credit lines
granted to each borrower. Loan syndication fees are recognized upon completion of all
syndication activities and where the Bank does not have further obligations to perform
under the syndication agreement.
Service charges and penalties are recognized only upon collection.
Leases
Operating lease payments are recognized as an expense in the statements of income on
a straight-line basis over the lease term.
Retirement Cost
The Bank determines retirement cost under the projected unit credit cost method. Under
this method, the current service cost is the present value of retirement benefits payable
in the future with respect to services rendered in the current period. The accrued
actuarial liability is the present value of benefits payable in the future with respect to
services rendered to date. Unfunded past service cost, experience adjustments and any
actuarial gains or losses are amortized over the expected average remaining working life
of the employees. Retirement cost includes current service cost, amortization of past
service costs, interest on unfunded accrued retirement liability, experience adjustments
and actuarial gain or losses, if any.
F-45
As discussed in the changes in accounting policies, the accrued actuarial liability, net of
the fair value of the pension plan assets, shall be recognized as part of the Bank’s
liabilities in the statement of condition by way of a retroactive adjustment to the Surplus
account as of January 1, 2004 in accordance with PAS 19.
Foreign Exchange Transactions and Translations
Foreign currency-denominated assets and liabilities are translated to Philippine pesos
using the Philippine Dealing System weighted average rates (PDSWAR) prevailing at the
end of the year. Income and expense items are translated at PDSWAR prevailing at
transaction dates. Exchange differences arising from reporting monetary items at rates
different from those at which they where previously recorded, as well as foreign
exchange gains or losses arising from foreign currency are credited to or charged
against operations in the year in which the rates change.
Provisions and Contingencies
Provisions are recognized when an obligation (legal or constructive) is incurred as a
result of a past event and where it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a reliable estimate can be
made of the amount of the obligation. If the effect of the time value of money is material,
provisions are determined by discounting the expected future cash flows at a pre-tax rate
that reflects current market assessment of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used, the increase
in the provision due to the passage of time is recognized as an interest expense.
Contingent liabilities are not recognized but are disclosed in the financial statements
unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets are not recognized but are disclosed in the financial statements when
an inflow of economic benefits is probable.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding, after giving retroactive effect to stock dividends declared,
stock rights exercised and stock splits made during the year.
Subsequent Events
Post-year-end events that provide additional information about the Bank’s position at the
statement of condition date (adjusting events) are reflected in the financial statements.
Post-year-end events that are not adjusting events are disclosed in the notes to the
financial statements when material.
3.
Segment Information
The Bank’s operating businesses are organized and managed separately according to
the nature of services provided and the different markets served with segments
representing strategic business unit. The Bank’s business segments are as follows:
Consumer Banking — principally handling individual customers’ deposits, and providing
consumer-type loans, overdrafts and fund transfer facilities;
Corporate Banking — principally handling loans and other credit facilities, and deposit
and current accounts for corporate and institutional customers; and
Treasury — principally providing money market, trading and treasury services, as well as
the managing of the Bank’s funding operations by use of treasury bills, government
securities and placements and acceptances with other banks, through treasury.
These segments are the bases on which the Bank reports its primary segment
information. Other operations of the Bank comprise the operations and financial control
groups. Transactions between segments are conducted at estimated market rates on an
arm’s length basis.
F-46
Primary segment information (by business segment) for the years ended September 30,
2005, and 2004 follows (in thousands):
2005
Consumer
Banking
Results of Operations
Net interest income
Noninterest income
Total revenue
Noninterest expense
P
= 1,379,394
292,843
Corporate
Banking
P
= 522,231
109,114
Treasury
P
= 131,202
133,489
264,691
(26,911)
Total
P
= 2,032,827
535,446
1,672,237
(1,538,722)
631,345
(580,424)
2,568,273
(2,146,057)
Income before income tax
Income tax provision/(benefit)
133,515
(36,005)
50,921
(34,228)
237,780
64,664
422,216
(5,569)
Net income
169,520
85,149
173,116
427,785
Statement of Condition
Total resources
P
= 22,849,860
P
= 11,603,775
P
= 18,398,426
P
= 52,852,061
Total liabilities
P
= 20,121,374
P
= 9,895,719
P
= 18,204,168
P
= 48,221,261
Other Segment Information
Capital expenditures
P
= 296,947
P
= 71,967
P
= 1,419
P
= 370,333
Depreciation and
amortization
P
= 107,179
P
= 26,960
P
= 531
P
= 134,670
2004
(As restated — Note 2)
Consumer
Banking
Results of Operations
Net interest income
Noninterest income
Total revenue
Noninterest expense
P
= 994,530
303,311
P
= 401,214
111,299
1,297,841
(1,140,082)
512,513
(413,925)
157,759
(10,278)
98,588
(6,867)
Income before income tax
Income tax provision/(benefit)
Net income
Corporate
Banking
P
= 168,037
P
= 105,455
Treasury
P
= 10,853
65,895
76,748
(9,842)
Total
P
= 1,406,597
480,505
1,887,102
(1,563,849)
66,906
35,576
323,253
18,431
P
= 31,330
P
= 304,822
Statement of Condition
Total resources
P
= 18,284,127 P
= 10,933,567 P
= 13,408,456 P
= 42,626,150
Total liabilities
P
= 16,291,856
P
= 9,258,611 P
= 13,080,768 P
= 38,631,235
Other Segment Information
Capital expenditures
P
= 105,410
P
= 42,303
P
= 806
P
= 148,519
Depreciation and amortization
P
= 57,399
P
= 34,991
P
= 667
P
= 93,057
Total resources do not include deferred tax assets amounting to P
= 384.1 million and
P
= 202.1 million as of September 30, 2005 and 2004.
4.
Trading and Investment Securities
TAS includes unrealized loss of P
= 0.09 million in 2005 and P
= 0.002 million in 2004.
As of September 30, 2005, ASS is carried net of accumulated unrealized loss of P
= 397.4
million.
F-47
IBODI consists of the following:
2005
Government bonds (Note 18)
BSP Treasury bills
Private bonds
Treasury notes
P
= 2,820,427,474
7,999,588
395,610,552
898,770,845
Less allowance for probable losses (Note 9)
4,122,808,459
(62,146,858)
P
= 4,060,661,601
2004
P
= 9,931,711,120
562,539,383
395,610,552
506,040,080
11,395,901,135
(47,805,276)
P
= 11,348,095,859
As of September 30, 2005 and 2004, the aggregate market value of the IBODI amounted
to P
= 4.37 billion and P
= 11.06 billion, respectively.
Market values of IBODI follow:
2005
Government bonds (Note 18)
BSP Treasury bills
Private bonds
Treasury notes
2004
P
= 3,014,048,052
8,074,561
397,027,105
947,027,499
P
= 9,631,438,690
554,049,471
377,380,482
499,119,412
P
= 4,366,177,217
P
= 11,061,988,055
As of September 30, 2005 and 2004, foreign-currency denominated trading and
investment securities bear nominal annual interest rates ranging from 7.68% to 8.80%
in 2005 and from 7.57% to 8.56% in 2004 and peso-denominated trading and investment
securities bear nominal annual interest rates ranging from 7.46% to 12.40% in 2005 and
from 8.82% to 12.11% in 2004.
5.
Loans and Receivables
This account consists of:
2005
Loans and discounts
Bills purchased
P
= 29,874,870,541
130,565,055
30,005,435,596
(2,055,080,021)
(1,150,478,968)
Unearned discounts
Allowance for probable losses (Note 9)
P
= 26,799,876,607
2004
P
= 25,275,992,807
107,512,954
25,383,505,761
(1,590,050,298)
(866,243,948)
P
= 22,927,211,515
There were no rediscounted loans as of September 30, 2005 and September 30, 2004.
Restructured loans as of September 30, 2005 and 2004 amounted to P
= 772.1 million and
P
869.8
million,
respectively.
=
As of September 30, 2005 and 2004, 45.67% and 55.09% of the total receivables were
subject to periodic interest repricing, respectively. Remaining receivables earned annual
fixed interest rates which averaged 19.50% in 2005 and 20.1% in 2004.
F-48
The breakdown of receivables from customers as to secured and unsecured and as to
type of security follows:
2005
Secured by:
Real estate
Chattel
Deposit hold-out
Securities
Others
Unsecured
%
2004
%
P
= 11,079,302,207
10,766,399,394
354,338,312
—
914,270,856
36.92
35.88
1.18
—
3.05
P
= 9,620,201,986
8,147,420,390
502,235,880
—
1,493,022,663
37.90
32.10
1.98
—
5.88
23,114,310,769
6,891,124,827
77.03
22.97
19,762,880,919
5,620,624,842
77.86
22.14
P
= 30,005,435,596
100.00
P
= 25,383,505,761
100.00
As of September 30, 2005 and 2004, nonaccruing loans follow:
2005
Secured
Unsecured
2004
P
= 1,174,985,455
801,344,154
P
= 814,080,972
428,864,082
P
= 1,976,329,609
P
= 1,242,945,054
Current banking regulations allow banks with no unbooked valuation reserves and capital
adjustments to exclude from nonperforming classification loans classified as Loss in the
latest examination of the BSP which are fully covered by allowance for probable losses,
provided that interest on said receivables shall not be accrued. As of September 30,
2005 and 2004, the nonperformimg loans (NPLs) of the Bank not fully covered by
allowance for probable losses follow:
2005
Total NPLs
NPLs fully covered by allowance for probable
losses
2004
P
= 1,754,297,918
P
= 1,384,285,216
(325,638,000)
P
= 1,428,659,918
(325,638,000)
P
= 1,058,647,216
As of September 30, 2005 and 2004, the loan concentration as to economic activity
follows:
2005
Other community, social
and personal activities
Real estate
Wholesale and retail trade
Agriculture
Banks, insurance and other
financial institutions
Public utilities
Manufacturing
Services
Mining and quarrying
Others
%
2004
%
P
= 10,739,897,216
5,933,648,078
7,546,834,223
2,031,939,705
35.79
19.78
25.15
6.77
P
= 7,655,366,106
5,212,442,191
7,274,727,111
1,469,637,051
30.16
20.54
28.66
5.79
621,336,682
1,663,365,989
948,698,972
323,073,299
16,237,422
180,404,010
2.07
5.55
3.16
1.08
0.05
0.60
1,351,278,852
1,214,633,564
779,394,859
234,492,543
10,242,163
181,291,321
5.32
4.79
3.07
0.92
0.04
0.71
P
= 30,005,435,596
100.00
P
= 25,383,505,761
100.00
Thrift banks are not covered by the loan concentration limit of 30% as prescribed by
BSP.
F-49
6.
Bank Premises, Furniture and Equipment
The composition and movements in the bank premises, furniture and equipment account
follow:
2005
Land
Cost
Balance at beginning
of year
Acquisitions
Disposals/others
Balance at end of
year
Accumulated
Depreciation
Balance at beginning
of year
Depreciation
Disposals
Balance at end of
year
Net Book Value
Furniture,
Fixtures and
Equipment
Building
P
= 73,749,955
1,835,000
—
75,584,955
—
—
—
Leasehold
Improvements
Total
2004
P
= 1,266,872,174
245,025,394
(5,308,061)
P
= 764,259,998
78,186,586
(105,216,594)
P
= 148,071,518
45,286,331
(29,333,891)
P
= 2,252,953,645
370,333,311
(139,858,546)
P
= 2,099,025,143
148,519,034
(40,245,041)
1,506,589,507
737,229,990
164,023,958
2,483,428,410
2,207,299,136
221,673,354
40,351,524
(1,555,262)
492,035,597
64,985,064
(115,028,012)
—
—
—
713,708,951
105,336,588
(116,583,274)
595,333,807
76,155,772
15,166,462
—
260,469,616
441,992,649
—
702,462,265
686,656,041
P
= 75,584,955
P
= 1,246,119,891
P
= 295,237,341
P
= 164,023,958
P
= 1,780,966,145
P
= 1,520,643,095
Depreciation and amortization amounted to P
= 134.7 million in 2005 and P
= 93.1 million in
2004 (includes amortization of leasehold improvements amounting to P
= 29.3 million in
2005 and P
16.9
million
in
2004).
=
7.
Real and Other Properties Owned or Acquired
This account consists of:
2005
ROPOA
Less allowance for probable losses (Note 9)
2004
P
= 1,890,051,422
(114,072,699)
P
= 1,735,866,593
(41,231,482)
P
= 1,775,978,723
P
= 1,694,635,111
Net gains from sale of ROPOA amounted to P
= 52.8 million in 2005 and P
= 68.6 million in
2004 are presented as Profit from assets sold in the statements of income.
F-50
8.
Other Resources
This account consists of:
2005
2004
Accrued interest receivable (Note 12)
Sales contract receivable (Note 12)
Accounts receivable (Note 12)
Intangible assets — net
Foreign currency notes and coins on hand
Other investments — at cost (Note 12)
Returned checks and other cash items
Prepaid expenses
Sundry debits
Miscellaneous
P
= 428,014,518
491,460,894
292,832,095
88,019,218
45,865,747
53,964,914
40,204,330
45,910,379
11,155,846
145,347,679
P
= 312,245,090
402,014,139
206,811,691
93,516,784
49,574,494
105,399,258
48,083,284
42,644,276
10,884,865
107,622,498
Less allowance for probable losses (Note 9)
1,642,775,620
173,317,746
1,378,796,379
189,834,351
P
= 1,469,457,874
P
= 1,188,962,028
Sales contract receivable earned interest rate ranging from 8.65% to 10.68% in 2005 and
9.66% to 14.70% in 2004.
The composition and movements of intangible assets follow:
2005
Software
Cost
9.
Goodwill License Fees
Total
2004
Balance at beginning of year
Additions/(Disposals)
Amortization
P
= 46,524,268
15,944,030
(15,517,151)
P
= 29,958,338
(58,388)
(11,212,500)
P
= 18,875,000
8,964,061
(5,458,440)
P
= 95,357,606 P
= 110,322,826
24,849,703
23,019,447
(32,188,091)
(39,825,489)
Balance at end of year
P
= 46,951,147
P
= 18,687,450
P
= 22,380,621
P
= 88,019,218
P
= 93,516,784
Allowance for Probable Losses
Changes in the allowance for probable losses follow:
Balance at beginning of year:
IBODI
Receivables from customers
ROPOA
Other resources
2005
2004
P
= 62,146,858
862,282,646
80,695,972
219,889,581
P
= 95,610,551
663,420,442
193,706,578
151,377,486
1,225,015,057
1,104,115,057
Provisions for the year charged against
operations
Others
275,000,000
1,214
41,000,000
Balance at end of year:
IBODI (Note 4)
Receivables from customers (Note 5)
ROPOA (Note 7)
Other resources (Note 8)
62,146,858
1,150,478,968
114,072,699
173,317,746
47,805,276
866,243,948
41,231,482
189,834,351
P
= 1,500,016,271
P
= 1,145,115,057
F-51
With the foregoing level of allowance for probable losses, management believes that the
Bank has sufficient level of allowance to take care of any losses that the Bank may incur
from the noncollection or nonrealization of its receivables from customers and other risk
assets.
10. Deposit Liabilities
Available reserves as of September 30, 2005 and 2004 follow:
2005
Cash
Due from BSP
Available for sale securities-net
IBODI
2004
P
= 485,261,849
1,777,674,988
716,290,257
—
P
= 438,577,943
1,058,096,042
—
546,493,330
P
= 2,979,227,094
P
= 2,043,167,315
Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity
reserve equivalent to 2% and statutory reserve of 6%. As of September 30, 2005 and
2004, the Bank was in compliance with such regulation.
As of September 30, 2005 and 2004, 62.11% and 72.46% of the deposit liabilities were
subject to periodic interest repricing, respectively. Remaining deposits earned annual
fixed interest rate, which averaged 5.95% in 2005 and 2004.
11. Other Liabilities
This account consists of:
2005
Accounts payable (Note 12)
Bills purchased-contra (Note 12)
Other credits (Note 12)
Unearned income
Withholding taxes payable (Note 12)
Dividends payable (Notes 12 and 18)
Sundry credits
Miscellaneous
2004
P
= 333,224,155
130,565,055
87,815,616
56,906,850
41,549,157
28,952,641
6,362,492
53,102,373
P
= 387,957,132
107,512,954
79,023,155
40,600,072
36,873,637
2,260,656
5,835,169
50,117,052
P
= 738,478,339
P
= 710,179,827
Accounts payable includes payable to suppliers and service providers and payments for
principal, interest and other charges received from customers in advance.
F-52
12. Maturity Profile of Financial Resources and Financial Liabilities
The following tables present the financial resources and financial liabilities by contractual
maturity and settlement dates as of September 30, 2005 and 2004 :
2005
Financial Resources
Due from BSP
2004
Due Within
Due Beyond
One Year
One Year
Total
Due Within
Due Beyond
One Year
One Year
Total
P
= 1,774,617,226
P
=—
P
= 1,774,617,226
P
= 1,057,645,384
P
=—
P
= 1,057,645,384
Due from other banks
881,213,884
—
881,213,884
1,792,427,729
—
1,792,427,729
Interbank loans receivable
550,000,000
—
550,000,000
585,000,000
—
585,000,000
TAS
127,302,027
—
127,302,027
—
79,132,607
79,132,607
Available-for-sale securities
868,374,041
12,296,495,902
13,164,869,943
—
—
—
IBODI (Note 4)
200,000,000
3,922,808,459
4,122,808,459
776,845,847
10,619,055,288
11,395,901,135
13,429,436,060
16,575,999,536
30,005,435,596
18,560,740,870
6,822,764,891
25,383,505,761
Loans and receivables
(Note 5)
Other resources (Note 8):
Accrued interest receivable
100,218,225
327,796,293
428,014,518
312,245,090
—
312,245,090
2,247,389
489,213,505
491,460,894
336,332,213
65,681,926
402,014,139
266,957,838
25,874,257
292,832,095
206,811,691
—
206,811,691
28,964,914
25,000,000
53,964,914
105,399,258
—
105,399,258
P
= 18,229,331,604
P
= 33,663,187,952
P
= 51,892,519,556
P
= 23,733,448,082
P
= 17,586,634,712
P
= 41,320,082,794
Sales contract receivable
Accounts receivable
Other investments
2004
2005
Financial Liabilities
(As restated)
Due Within
Due Beyond
One Year
One Year
Total
Due Within
Due Beyond
One Year
One Year
Total
Deposit liabilities
Demand
P
= 3,290,637,945
P
= 2,177,987,762
P
= 5,468,625,707
P
= 1,589,778,881
P
=—
Savings
3,500,757,046
6,720,264,489
10,221,021,535
21,961,828,256
—
21,961,828,256
13,961,974,258
17,155,599,433
31,117,573,691
10,410,208,156
3,422,844,488
13,833,052,644
20,753,369,249
26,053,851,684
46,807,220,933
33,961,815,293
3,422,844,488
37,384,659,781
214,856,674
—
214,856,674
206,385,088
—
206,385,088
319,722,831
140,982,160
460,704,991
330,009,940
—
330,009,940
Accounts payable
322,774,450
10,449,705
333,224,155
375,790,832
12,166,300
387,957,132
Bills purchased — contra
130,565,055
—
130,565,055
107,512,954
—
107,512,954
—
87,815,616
87,815,616
—
79,023,155
79,023,155
Dividends payable
28,952,641
—
28,952,641
2,260,656
—
2,260,656
Withholding taxes payable
41,549,157
—
41,549,157
36,873,637
—
36,873,637
P
= 21,811,790,057
P
= 26,293,099,165
P
= 48,104,889,222
P
= 35,020,648,400
P
= 3,514,033,943
P
= 38,534,682,343
Time
Cashier’s and gift checks
P
= 1,589,778,881
Accrued taxes, interest and
other expenses
Other liabilities (Note 11):
Other credits
13. Miscellaneous Income
This account consists of:
Rent (Note 14)
Foreign exchange gain — net
Recovery from accounts written-off
Income from trust operations
Others
F-53
2005
2004
P
= 23,627,870
(7,442,909)
4,356,743
1,771,626
25,223,192
P
= 20,690,397
2,518,128
2,158,845
2,089,084
45,248,287
P
= 47,536,522
P
= 72,704,741
14. Leases
The Bank leases the premises occupied by its branches for periods ranging from 1 to 20
years renewable under certain terms and conditions. Various lease contracts include
escalation clauses, most of which bear an annual rent increase of 10%. Rentals charged
against operations under these lease contracts amounting to P
= 137.4 million in 2005 and
P
= 110.5 in 2004 and are shown under Occupancy and equipment-related expenses in the
statements of income.
Future minimum rentals payable under non-cancelable operating leases are as follows:
2005
Within one year
After one year but not more than five years
After more than five years
2004
P
= 156,799,529
536,026,808
224,628,729
P
= 155,315,801
450,445,351
299,329,676
P
= 917,455,066
P
= 905,090,828
The Bank entered into commercial property leases on its surplus office. These noncancelable leases have remaining non-cancelable lease terms of between 1 and 5 years.
As of September 30, 2005, there is no contingent rental income. Rent income of the
Bank, as shown under Miscellaneous income related to these property leases amounted
to P
= 23.627 million in 2005 and P
= 20.690 million in 2004.
Future minimum rentals receivable under non-cancelable operating leases are as follows:
2005
Within one year
After one year but not more than five years
2004
P
= 26,359,398
2,085,326
P
= 2,471,969
902,888
P
= 28,444,724
P
= 3,374,857
15. Miscellaneous Expenses
This account consists of:
Insurance
Advertising
Information technology
Litigation
Communications
Transportation and traveling
Management and professional fees
Stationery and supplies
Repairs and maintenance
Supervision and examination fees
Membership fees and dues
Fines, penalties and other charges
Entertainment, amusement and recreation
(Note 16)
Others
2005
2004
P
= 87,394,647
79,492,237
67,398,558
54,947,608
42,977,485
28,248,089
28,081,293
27,239,295
22,250,419
13,614,000
4,594,550
4,226,583
P
= 54,582,706
25,629,708
57,576,976
40,629,188
34,568,636
23,481,400
21,984,007
19,187,458
18,631,667
7,843,486
2,782,699
11,724,861
2,847,533
68,622,896
3,199,539
82,212,456
P
= 531,935,193
P
= 404,034,787
Insurance expense includes premiums paid to the Philippine Deposit Insurance
Corporation amounting to P
= 72.01 million in 2005 and P
= 44.38 million in 2004.
F-54
16. Income and Other Taxes
Under Philippine tax laws, the Bank is subject to percentage and other taxes (presented
as Taxes and Licenses in the statements of income) as well as income taxes. Percentage
and other taxes paid consist principally of gross receipts tax (GRT) and documentary
stamps taxes. Effective January 1, 2003, the Bank was subject to the value-added tax
instead of GRT. However, Republic Act No. 9238 reimposed GRT on the Bank effective
January 1, 2004.
Income taxes include corporate income tax, discussed below, and final taxes paid at the
rate of 20%, which is a final withholding tax on gross interest income from government
securities, and other deposit substitutes.
Effective November 1, 2005, the regular corporate income tax shall be 35% until January
1, 2009. Starting January 1, 2009, the regular corporate income tax rate shall be 30%.
Current tax regulations also provide for the ceiling on the amount of entertainment,
amusement and recreation (EAR) expense that can be claimed as a deduction against
taxable income. Under the regulation, EAR expense allowed as a deductible expense for
a service company is limited to the actual EAR paid or incurred but not to exceed 1% of
net revenue. The regulations also provide for MCIT of 2% on modified gross income and
allow a NOLCO. The MCIT and NOLCO may be applied against the Bank’s income tax
liability and taxable income, respectively, over a three-year period from the year of
inception.
FCDU offshore income (income from non-residents) is tax-exempt while gross onshore
income (income from residents) is subject to 10% income tax. In addition, interest income
on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at
7.50%. Republic Act No. 9294, which became effective in May 2004, provides that the
income derived by the FCDU from foreign currency transactions with non-residents,
OBUs, local commercial banks including branches of foreign banks is tax-exempt while
interest income on foreign currency loans from residents other than OBUs or other
depository banks under the expanded system is subject to 10% income tax. Prior to
2005, the Bank’s FCDU transactions are being tax under the regular income tax rate.
Provision for/ (benefit from) income tax consists of:
Current:
Final tax
MCIT
2005
2004
P
= 64,596,175
28,281,955
P
= 43,760,169
17,096,691
92,878,130
(98,447,063)
Deferred
60,856,860
(42,425,992)
(P
= 5,568,933)
P
= 18,430,868
2005
2004
Recognized deferred tax assets consist of:
Temporary differences on:
Allowance for probable losses
Accrued rent
NOLCO
Carryforward benefits of MCIT
F-55
P
= 258,409,838
28,990,442
26,279,017
70,461,488
P
= 120,359,747
20,665,527
24,385,275
36,679,550
P
= 384,140,785
P
= 202,090,099
Unrecognized deferred tax assets consist of:
2005
Temporary differences on:
Allowance for probable losses
Unamortized past service costs
Unrealized loss on foreclosures
NOLCO
Carryforward benefits of MCIT
2004
P
= 266,595,857
33,744,904
1,155,872
—
18,039,966
P
= 359,645,459
34,374,595
1,155,872
73,522,617
18,039,966
P
= 319,536,599
P
= 486,738,509
Management believes that it is not probable that these temporary differences, unused tax
credits and tax losses will be realized in the future.
Details of the Bank’s NOLCO follow:
Inception Year
Amount
Applied
Balance
2002
2003
2004
P
= 77,068,149
26,203,985
202,690,028
(P
= 77,068,149)
(26,203,985)
(127,607,122)
P
=—
—
75,082,906
P
= 305,962,162
(P
= 231,879,256)
P
= 75,082,906
Expiry Year
2005
2006
2007
Details of the Bank’s MCIT follow:
Inception Year
Amount
Expired
Balance
2002
2003
2004
2005
P
= 18,039,966
19,582,859
22,596,674
28,281,955
P
=—
—
—
—
P
= 18,039,966
19,582,859
22,596,674
28,281,955
P
= 88,501,454
P
=—
P
= 88,501,454
Expiry Year
2005
2006
2007
2008
The reconciliation between the statutory income tax rate and effective income tax rate
follows:
2005
2004
Statutory income tax rate
Tax effect of:
Tax-paid and tax-exempt income
Nondeductible expense
Others
32.00%
32.00%
(13.01)
11.10
(31.40)
(46.66)
22.91
(2.55)
Effective income tax rate
(1.31%)
5.70%
17. Trust Operations
Securities and other resources held by the Bank in fiduciary or agency capacity for its
customers are not included in the accompanying statements of condition since these are
not resources of the Bank (see Note 22).
In connection with the trust functions of the Bank, government securities with face value
of P
= 2.10 million and P
= 970.66 million as of September 30, 2005 and 2004, respectively,
are deposited with the BSP in compliance with trust regulations.
Additionally, 10% of the Bank’s net profit realized by the Bank from its trust operations is
appropriated to surplus reserve until such reserve for trust functions amounts to 20% of
the Bank’s regulatory capital.
F-56
18. Capital Funds
Details of the Bank’s dividend distribution follow:
Dividends
Date of declaration
November 19, 2001
January 27, 2003
November 25, 2003
August 24, 2004
December 31, 2004
March 16, 2005
April 28, 2005
Per
share
P
= 1.00
0.60
1.00
0.40
0.20
0.15
0.15
The determination of
based on the amount
to the BSP, which is
differ from Philippine
Total amount
P
= 179,501,520
107,700,912
179,501,520
71,800,608
35,900,304
26,925,228
26,925,228
Date of BSP
approval
Record date
Payment date
December 7, 2001
February 27, 2003
January 12, 2004
September 30, 2004
February 23, 2005
April 15, 2005
June 14, 2005
January 1, 2002
March 26, 2003
February 10, 2004
October 25, 2004
March 16, 2005
May 12, 2005
July 8, 2005
February 8, 2002
April 8, 2003
March 5, 2004
November 10, 2004
April 1, 2005
May 26, 2005
July 22, 2005
the Bank’s compliance with regulatory requirements and ratios is
of the Bank’s ��unimpaired capital’’ (regulatory networth) as reported
determined on the basis of regulatory accounting practices which
GAAP in some respects.
Under Section 9 of the Thrift Banks Act, the combined capital accounts of each bank
should not be less than an amount equal to ten percent (10%) of its risk assets. Risk
assets consist of total assets after exclusion of cash on hand, due from BSP, loans
covered by hold out or assignment of deposits, loans or acceptances under letters of
credit to the extent covered by margin deposits and other non-risk items as determined
by the MB.
Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio (CAR)
is to be inclusive of a market risk change. Using this formula, the CAR of the Bank was
13.54% and 14.41% as of September 30, 2005 and 2004, respectively.
19. Earnings Per Share (EPS)
The following table presents information used to calculate basic EPS:
2005
a.
b.
c.
Net income
Weighted average number of common
shares
EPS (a/b)
2004
P
= 427,785,076
P
= 304,822,003
179,501,520
2.38
179,501,520
1.70
As of September 30, 2005 and 2004, there were no shares of stock with dilutive effect on
the basic EPS of the Bank.
20. Related Party Transactions
In the ordinary course of business, the Bank has loans and other transactions with its
affiliates, and with certain directors, officers, stockholders and related interests (DOSRI).
Under the Bank’s policy, these loans and other transactions are made substantially on
the same terms as with other individuals and businesses of comparable risks. The
General Banking Law limits the amount of direct credit accommodations to DOSRI, 70%
of which must be secured and should not exceed the total of their respective deposits
and book value of their respective investments in the Bank. In the aggregate, loans to
DOSRI generally should not exceed the lower of the Bank’s total capital funds or 15% of
the Bank’s total loan portfolio.
BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
F-57
The following table shows information relating to the loans, other credit accommodations
and guarantees classified as DOSRI accounts under regulations existing prior to said
circular and new DOSRI loans, other credit accommodations granted under said circular
as of September 30, 2005 and 2004 :
2005
Total outstanding DOSRI accounts
Percent of DOSRI accounts granted under
regulations existing prior to BSP Circular
No. 423 to total loans
Percent of new DOSRI accounts granted
under BSP Circular No. 423 to total loans
Percent of unsecured DOSRI accounts to total
DOSRI accounts
Percent of past due DOSRI accounts to total
DOSRI accounts
Percent of nonperforming DOSRI accounts to
total DOSRI accounts
2004
P
= 977,097,789
P
= 1,936,194,898
3.26%
7.72%
—
—
35.33%
24.67%
—
—
—
—
As of September 30, 2005, the Bank has no loans, other credit accommodations and
guarantees, as well as availments of previously approved loans and committed credit
lines not considered DOSRI accounts prior to the issuance of said circular but are
allowed a transition period of two years from the effectivity of the said circular until said
circular or said loan, other credit accommodations and guarantees become past due, or
are extended, renewed or restructured, whichever comes later.
Total interest income to these DOSRI loans amounted to P
= 140.7 million and P
= 151.5
million in 2005 and 2004, respectively.
Other significant transactions and outstanding balances of the Bank with Metrobank and
its affiliates follow:
2005
Statement of condition accounts:
Due from other banks — Metrobank
Interbank loans receivable — Metrobank
Deposit liabilities:
First Metro Investment Corporation
(FMIC)
SMBC Metro Investment Corporation
MBTC Technology, Inc., (MTI)
Statement of income accounts:
Interest income on due from other banks
and interbank loans receivable
Interest expense on deposit liabilities
Interest expense on bills payable
2004
P
= 574,612,097
—
P
= 1,705,266,062
200,000,000
85,779,597
3,490,462,202
98,664,181
40,334,428
—
—
—
5,519,344
—
181,539
46,479,135
1,111,094
8,779,781
The total assets of retirement fund of employees amounting to P
= 127.75 million and
P
= 87.817 million as of September 30, 2005 and 2004, respectively, is being managed by
the Bank’s trust department.
21. Retirement Plan
The Bank has a funded, noncontributory defined benefit plan covering substantially all of
its employees. The benefits are based on years of service and final compensation. Total
retirement expense which amounted to P
= 55.03 million in 2005 and P
= 49.31 million in
2004, is included under Compensation and fringe benefits in the statements of income.
F-58
Based on the actuarial valuation report dated October 31, 2004, the fair value of the plan
assets amounted to P
= 95.6 million. The unfunded actuarial liability of P
= 79.2 million as of
that date is amortized over the estimated average remaining working life of the
employees. Other principal actuarial assumptions used to determine retirement benefits
in such actuarial valuation were an investment earning rate of 10.00% per annum (p.a.),
and salary increase of 10.00%, both compounded annually. The Bank’s annual
contribution consists of payment covering the current service cost, interest on the
unfunded actuarial accrued liability and the annual amortization of the unfunded accrued
liability less the amortization of the actuarial gain (or loss) on the plan assets. Actuarial
valuations are made at least every two years.
22. Commitments and Contingent Liabilities
In the normal course of the Bank’s operations, there are various outstanding
commitments and contingent liabilities such as guarantees and commitments to extend
credit, which are not reflected in the accompanying financial statements. The Bank does
not anticipate significant losses as a result of these transactions.
The following is a summary of the Bank’s commitments and contingent liabilities at their
equivalent peso contractual amounts:
2005
Trust department accounts (see Note 17)
Late deposits/payments received
Items held for safekeeping
Outward bills for collection
Others
2004
P
= 398,143,090
119,311,421
76,920
242,382
25,465
P
= 1,050,862,412
69,239,614
61,551
451,751
1,785
In addition, the Bank has received tax assessments from the Bureau of Internal Revenue
on two banking industry issues. Management and tax counsels believe that they have a
valid defense against such claims. Accordingly, no provision for probable losses has
been provided.
Several suits and claims relating to the Bank’s lending operations and labor-related
cases remain unsettled. In the opinion of management, these suits and claims, if decided
adversely, will not involve sums having a material effect on the financial statements.
23. Financial Performance
The following basic ratios measure the financial performance of the Bank:
2005
Return on average equity
Return on average assets
Net interest margin on average earning assets
2004
12.07%
1.12
5.83
9.17%
1.07
5.59
24. Approval of the Release of the Financial Statements
The accompanying financial statements were authorized for issue by the management on
January 3, 2006.
F-59
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PARTIES TO THE ISSUE
ISSUER
Philippine Savings Bank
PSBank Center
777 Paseo de Roxas corner Sedeno St., Makati City
LEAD MANAGER, SELLING AGENT AND MARKET MAKER
ING Bank N.V., MANILA BRANCH
21/F Tower One, Ayala Triangle
Ayala Avenue, Makati City
Multinational Investment Bancorporation
SELLING AGENT and MARKET MAKER
Philippine Savings Bank
LIMITED SELLING AGENT
REGISTRY AND PAYING AGENT
Trust Services Department
Development Bank of the Philippines
DBP Bldg., Sen. Gil J. Puyat Ave
Makati City
PUBLIC TRUSTEE
Trust Services Department
Development Bank of the Philippines
DBP Bldg., Sen. Gil J. Puyat Ave
Makati City
LEGAL ADVISERS
To the Lead Manager
Picazo Buyco Tan Fider and Santos
19/F, 18/F and 17/F Liberty Center
104 H.V. de la Costa St., Makati City
EXTERNAL AUDITOR
SyCip, Gorres, Velayo & Co.
6760 Ayala Ave., Makati City
PHILIPPINE SAVINGS BANK
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